House Money and Investment Risk Taking
Posted: 25 Aug 2010
Date Written: August 23, 2010
This paper investigates the effect of house money on the risk-taking behavior of individual investors. When gains are more substantial, individuals tend to take greater risk. The house money effect seems to decline over time, because the propensity for risk taking following gains is diminished with time. This study shows that when evaluating investment gains, the reference points for investors are adapted over time, with the current salient reference point being the highest stock price attained at some time in the past. The empirical evidence suggests that the house money effect is actually discernible in the real-world financial markets, and not just in artificial laboratory experiments.
Keywords: Behavioral finance, House money effect, Risk taking, Reference points
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