Having a lucky day in the street and you find 10$. How are you going to spend them? Would you spend them in a small investment with a possibility of winning more or lose them?And when making sequential decisions, do these prior gains induce more or less risk taking than prior losses? There is some evidence that people receiving small, one time “windfall gains” have a higher marginal propensity to consume them, and when doing so, exhibit greater risk-seeking behavior. According to Thaler and Johnson (1990), after a prior gain people are more risk taking a contradiction to risk aversion and, like gamblers, they would want to take risk in recent won money. Henceforth, comes the term House Money Effect.This paper will try to explicate on what is House Money Effect and associate it with other behaviors observed and analyzed by other theories.In addition to this, we provide some results on a small survey carried out by the authors and our very own survey based on House Money Effect and the decisions subjects took.
Traditional Theory VS Behavioral Finance
Before we get an insight of House Money Effect,we first take a look at traditional theory and behavioural finance that have a strong determination on House Money Effect.There is a great contradiction between traditionalists and behaviorists,traditionalists believe that decision makers are orthological, they make rational decisions based on information that is distributed to them, all of them share the same information and accept it equally, the market is efficient which equals to prices reflecting their value upon this statement whereas On the other hand, behaviorists believe that psychology plays a major role in decision making (Broomfield,2009). People are affected by their feelings, other people’s opinions, actions, biases, individual recent informations which all lead to the inefficiency of the market. House Money Effect is associated with behavioral finance because people are influenced from the money...