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How Do Prior Outcomes Affect Risky Choice? Further Evidence on the House-Money Effect and Escalation of Commitment

Author

Listed:
  • Weber, Martin

    (Lehrstuhl für ABWL, Finanzwirtschaft, insb. Bankbetriebslehre)

  • Zuchel, Heiko

    (Universität Mannheim, Graduiertenkolleg Allokation auf Finanz- und Gütermärkten)

Abstract

In an experiment we study the influence of prior outcomes on risky choice. We document a strong framing effect. By manipulating the presentation format of the decision problem we can induce increased risk taking following a gain, i.e. the house-money effect (Thaler and Johnson 1990) or, alternatively, increased risk taking following a loss, i.e. escalation of commitment (Staw 1976). Maximization of a value function from prospect theory can explain some of our results. Escalation of commitment in our experiment does not appear to be driven by a need to justify or rationalize the initial decision.

Suggested Citation

  • Weber, Martin & Zuchel, Heiko, 2001. "How Do Prior Outcomes Affect Risky Choice? Further Evidence on the House-Money Effect and Escalation of Commitment," Sonderforschungsbereich 504 Publications 01-48, Sonderforschungsbereich 504, Universität Mannheim;Sonderforschungsbereich 504, University of Mannheim.
    • Handle: RePEc:xrs:sfbmaa:01-48
    Note: We gratefully acknowledge financial support from the Deutsche Forschungsgemeinschaft, through SFB504 and the Graduiertenkolleg at Mannheim, and from the European Commission through the RTN
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    Cited by:

    1. Schade, Christian & Steul, Martina & Schröder, Andreas, 2002. "Starting points' effects on risk-taking behavior," SFB 373 Discussion Papers 2002,15, Humboldt University of Berlin, Interdisciplinary Research Project 373: Quantification and Simulation of Economic Processes.
    2. 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.
    3. Monika Czerwonka, 2015. "The exploration of disposition effect among business undergraduates in Poland," Copernican Journal of Finance & Accounting, Uniwersytet Mikolaja Kopernika, vol. 4(2), pages 79-89.
    4. William Goetzmann & Liang Peng, 2003. "Estimating Indices in the Presence of Seller Reservation Prices," Yale School of Management Working Papers ysm352, Yale School of Management, revised 01 May 2003.

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