House Money and Investment Risk Taking

Posted: 25 Aug 2010

See all articles by Yuan-Lin Hsu

Yuan-Lin Hsu

Shih Hsin University - Department of Finance

Edward H. Chow

National Chengchi University (NCCU) - Department of Finance and Banking

Date Written: August 23, 2010

Abstract

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

Suggested Citation

Hsu, Yuan-Lin and Chow, Edward Hsing-Yi, House Money and Investment Risk Taking (August 23, 2010). 23rd Australasian Finance and Banking Conference 2010 Paper. Available at SSRN: https://ssrn.com/abstract=1663565 or http://dx.doi.org/10.2139/ssrn.1663565

Yuan-Lin Hsu (Contact Author)

Shih Hsin University - Department of Finance ( email )

Taipei
Taiwan
8662-22368225 (Phone)
8662-22362265 (Fax)

Edward Hsing-Yi Chow

National Chengchi University (NCCU) - Department of Finance and Banking ( email )

64, Chih-nan Rd., Sec. 2, Mucha,
Taipei, 116
Taiwan
8862-2939-3091-81206 (Phone)
886-2-2939-3394 (Fax)

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