Gambling with the House Money and Trying to Break Even: The Effects of Prior Outcomes on Risky Choice

Management Science, Vol. 36, No. 6, pp. 643-660, 1990

Posted: 29 Jun 2009  

Richard H. Thaler

University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER)

Eric J. Johnson

Columbia Business School - Marketing

Date Written: 1990

Abstract

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

Suggested Citation

Thaler, Richard H. and Johnson, Eric J., Gambling with the House Money and Trying to Break Even: The Effects of Prior Outcomes on Risky Choice (1990). Management Science, Vol. 36, No. 6, pp. 643-660, 1990. Available at SSRN: https://ssrn.com/abstract=1424076

Richard H. Thaler (Contact Author)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
773-702-5208 (Phone)
773-702-0458 (Fax)

Eric J. Johnson

Columbia Business School - Marketing ( email )

New York, NY 10027
United States

Paper statistics

Downloads
1,501
Rank
8,857
Abstract Views
4,772