An Experimental Examination of the House Money Effect in a Multi-Period Setting

FRB of Atlanta Working Paper No. 2003-13

23 Pages Posted: 12 Nov 2003

See all articles by Lucy F. Ackert

Lucy F. Ackert

Kennesaw State University - Michael J. Coles College of Business

Narat Charupat

McMaster University - DeGroote School of Business

Bryan K. Church

Georgia Institute of Technology - Accounting Area

Richard Deaves

McMaster University - Michael G. DeGroote School of Business

Date Written: September 2003

Abstract

There is evidence that risk-taking behavior is influenced by prior monetary gains and losses. When endowed with house money, people become more risk taking. This paper is the first to report a house money effect in a dynamic, financial setting. Using an experimental method, the authors compare market outcomes across sessions that differ in the level of cash endowment (low and high). Their experimental results provide strong support for a house money effect. Traders' bids, price predictions, and market prices are influenced by the amount of money that is provided prior to trading. However, dynamic behavior is difficult to interpret due to conflicting influences.

Keywords: house money, prospect theory

JEL Classification: C91, C92, D80

Suggested Citation

Ackert, Lucy F. and Charupat, Narat and Church, Bryan K. and Deaves, Richard, An Experimental Examination of the House Money Effect in a Multi-Period Setting (September 2003). FRB of Atlanta Working Paper No. 2003-13, Available at SSRN: https://ssrn.com/abstract=457740 or http://dx.doi.org/10.2139/ssrn.457740

Lucy F. Ackert (Contact Author)

Kennesaw State University - Michael J. Coles College of Business ( email )

1000 Chastain Road
Department of Economics and Finance
Kennesaw, GA 30144
United States
770-423-6111 (Phone)
770-499-3209 (Fax)

Narat Charupat

McMaster University - DeGroote School of Business ( email )

1280 Main Street West
Hamilton, Ontario L8S 4M4
Canada
(905) 525-9140 ext. 23987 (Phone)

Bryan K. Church

Georgia Institute of Technology - Accounting Area ( email )

800 West Peachtree St.
Atlanta, GA 30308
United States
404-894-3907 (Phone)
404-894-6030 (Fax)

Richard Deaves

McMaster University - Michael G. DeGroote School of Business ( email )

1280 Main Street West
Hamilton, Ontario L8S 4M4
Canada
905-522-3976 (Phone)

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