Eric Johnson

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

Coauthor(s): R. Thaler.

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Abstract:
An investigation is conducted of how risk-taking is affected by prior gains and losses. Although normative theory implores decision makers to consider only incremental outcomes, real decision makers are influenced by prior outcomes. The question of how prior outcomes are combined with the potential payoffs offered by current choices is considered. An editing rule, called the quasi-hedonic editing hypothesis, is proposed to describe how decision makers frame such problems. Data are presented from real money experiments that support 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 that offer a chance to break even are especially attractive).

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