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It´s Not My Money: An Experiment on Risk Aversion and the House-money Effect

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  • Luis Roberto Martínez

    ()

  • Christian Jaramillo

    ()

  • Nicolas De Roux

    ()

  • Juan-Camilo Cárdenas

    ()

Abstract

The house-money effect -people´s tendency to be more daring with easily-gotten money- is abehavioral pattern that poses questions about the external validity of experiments in economics: to what extent do people behave in experiments like they would have in a real-life situation, given that they play with easily-gotten house money? We ran an economic experiment with 66 students to measure the house-money effect on their risk preferences. They received an amount of money with which they made risky decisions involving losses and gains; a treatment group got the money 21 days in advance and a control group got it the day of the experiment. We find that, when facing possible losses, people in the treatment group showed a lower tolerance to risk than people in the control group. If the players are assumed to have a CRRA utility function and to behave according to expected-utility theory, the risk-attitude adjustment corresponds to an average increase of 1 in their risk aversion coefficient. While the exact pattern of this house-money adjustment differs by gender, it is not possible to determine the sign of this gender effect unambiguously. In any case, it is advisable to include credible controls for the house-money effect in experimental work in economics.

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Bibliographic Info

Paper provided by UNIVERSIDAD DE LOS ANDES-CEDE in its series DOCUMENTOS CEDE with number 006712.

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Length: 16
Date of creation: 03 Jan 2010
Date of revision:
Handle: RePEc:col:000089:006712

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Related research

Keywords: House-money effect; risk aversion; prospect theory; economic experiment; external validity.;

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  1. Bosch-Domènech, Antoni & Silvestre, Joaquim, 2010. "Averting risk in the face of large losses: Bernoulli vs. Tversky and Kahneman," Economics Letters, Elsevier, vol. 107(2), pages 180-182, May.
  2. Guala,Francesco, 2005. "The Methodology of Experimental Economics," Cambridge Books, Cambridge University Press, number 9780521853408, October.
  3. Abigail Barr & Garance Genicot, 2007. "Risk Sharing, Commitment and Information: An experimental analysis," Economics Series Working Papers WPS/2007-17, University of Oxford, Department of Economics.
  4. Keasey, Kevin & Moon, Philip, 1996. "Gambling with the house money in capital expenditure decisions: An experimental analysis," Economics Letters, Elsevier, vol. 50(1), pages 105-110, January.
  5. Lucy Ackert & Narat Charupat & Bryan Church & Richard Deaves, 2006. "An experimental examination of the house money effect in a multi-period setting," Experimental Economics, Springer, vol. 9(1), pages 5-16, April.
  6. Keeler, James P & James, William L & Abdel-Ghany, Mohamed, 1985. "The Relative Size of Windfall Income and the Permanent Income Hypothesis," Journal of Business & Economic Statistics, American Statistical Association, vol. 3(3), pages 209-15, June.
  7. Cardenas, Juan Camilo & Carpenter, Jeffrey P., 2010. "Risk Attitudes and Well-Being in Latin America," IZA Discussion Papers 5279, Institute for the Study of Labor (IZA).
  8. Steven D. Levitt & John A. List, 2007. "What Do Laboratory Experiments Measuring Social Preferences Reveal About the Real World?," Journal of Economic Perspectives, American Economic Association, vol. 21(2), pages 153-174, Spring.
  9. Amos Tversky & Daniel Kahneman, 1979. "Prospect Theory: An Analysis of Decision under Risk," Levine's Working Paper Archive 7656, David K. Levine.
  10. Jeremy Clark, 2002. "House Money Effects in Public Good Experiments," Experimental Economics, Springer, vol. 5(3), pages 223-231, December.
  11. Richard H. Thaler & Eric J. Johnson, 1990. "Gambling with the House Money and Trying to Break Even: The Effects of Prior Outcomes on Risky Choice," Management Science, INFORMS, vol. 36(6), pages 643-660, June.
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Cited by:
  1. Brice Corgnet & Roberto Hernán González & Praveen Kujal & David Porter, 2013. "The Effect of Earned vs. House Money on Price Bubble Formation in Experimental Asset Markets," Working Papers 13-04, Chapman University, Economic Science Institute.
  2. Christoph Bühren & Thorben C. Kundt, 2013. "Worker or Shirker – Who Evades More Taxes? A Real Effort Experiment," MAGKS Papers on Economics 201326, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).
  3. Katarína Danková & Maroš Servátka, 2014. "The House Money Effect and Negative Reciprocity," Working Papers in Economics 14/06, University of Canterbury, Department of Economics and Finance.

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