An Experimental Examination of the House Money Effect in a Multi-Period Setting
Lucy F. Ackert, Narat Charupat, Bryan K. Church, and Richard Deaves
Working Paper 2003-13
There is evidence that risk-taking behavior is influenced by prior monetary gains and losses. When endowed with house money, people become more risk taking. This paper is the first to report a house money effect in a dynamic, financial setting. Using an experimental method, the authors compare market outcomes across sessions that differ in the level of cash endowment (low and high). Their experimental results provide strong support for a house money effect. Traders' bids, price predictions, and market prices are influenced by the amount of money that is provided prior to trading. However, dynamic behavior is difficult to interpret due to conflicting influences.
JEL classification: C91, C92, D80
Keywords: house money, prospect theory
The authors gratefully acknowledge the financial support of the Federal Reserve Bank of Atlanta and the Social Sciences and Humanities Research Council of Canada. The authors thank Steve Karan for research assistance and Paula Tkac for helpful comments. The views expressed here are the authors' and not necessarily those of the Federal Reserve Bank of Atlanta or the Federal Reserve System. Any remaining errors are the authors' responsibility.
Please address questions regarding content to Lucy F. Ackert, Department of Economics and Finance, Michael J. Coles College of Business, Kennesaw State University, 1000 Chastain Road, Kennesaw, Georgia 30144, (770) 423-6111, firstname.lastname@example.org and Research Department, Federal Reserve Bank of Atlanta, 1000 Peachtree Street NE, Atlanta, Georgia 30309-4470; Narat Charupat, Michael G. DeGroote School of Business, McMaster University, 1280 Main Street West, Hamilton, Ontario, Canada L8S 4M4, (905) 525-9140 ext. 23987, email@example.com; Bryan K. Church, DuPree College of Management, Georgia Tech, Atlanta, Georgia 30332-0520, (404) 894-3907, firstname.lastname@example.org; or Richard Deaves, Michael G. DeGroote School of Business, McMaster University, 1280 Main Street West, Hamilton, Ontario, Canada L8S 4M4, email@example.com.