Gambling with the House Money and Trying to Break Even: The Effects of Prior Outcomes on Risky Choice
Richard H. Thaler
University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER)
Eric J. Johnson
Columbia Business School - Marketing
Management Science, Vol. 36, No. 6, pp. 643-660, 1990
How is risk-taking affected by prior gains and losses? While normative theory implores decision makers to only consider incremental outcomes, real decision makers are influenced by prior outcomes. We first consider how prior outcomes are combined with the potential payoffs offered by current choices. We propose an editing rule to describe how decision makers frame such problems. We also present data from real money experiments supporting a "house money effect" (increased risk seeking in the presence of a prior gain) and "break-even effects" (in the presence of prior losses, outcomes which offer a chance to break even are especially attractive).
Keywords: decision making, prospect theory, sunk costs, mental accounting
Date posted: June 29, 2009
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