An experimental examination of the house money effect.pdfVIP

Exp Econ (2006) 9: 5–16 DOI 10.1007/s10683-006-1467-1 An experimental examination of the house money effect in a multi-period setting Lucy F. Ackert∗ · Narat Charupat · Bryan K. Church · Richard Deaves Received: December 4, 2003 / Revised: February 8, 2005 / Accepted: March 24, 2005 C Springer Science + Business Media, LLC 2006 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, we compare market outcomes across sessions that differ in the level of cash endow- ment (low and high). Our experimental results provide 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 Over the last two decades evidence from economics and psychology experiments has had a significant impact on financial models of asset pricing. Perhaps the most notable influence is Kahneman and Tversky’s (1979, 1992) prospect theory, which provides a descriptive model of decision-making under risk. According to the model, people derive utility from ∗The views expressed here are those of the authors and not necessarily those of the Federal Reserve Bank of Atlanta or the Federal Reserve System. L. F. Ackert () Department of Economics and Finance, Michael J. Coles College of Business, Kennesaw State University, Kennesaw, Georgia 30144; Research Department, Federal Reserve Bank of Atlanta, Atlanta, Georgia 30309-4470 e-mail: lackert@kennesaw.edu N. Charupat · R. Deaves Michael G. DeGroote School of Business, McMaster University, Hamilton, Ontario, Canada L8S 4M4 e-mail: charupa