It’s Not My Money: An Experiment on Risk Aversion and the House-Money Effect

16 Pages Posted: 18 Feb 2010 Last revised: 23 Mar 2010

See all articles by Luis R. Martinez

Luis R. Martinez

University of Chicago - Harris School of Public Policy

Christian R. Jaramillo

Universidad de los Andes

Nicolás de Roux

Universidad de los Andes - Department of Economics

Juan-Camilo Cárdenas

Universidad de Los Andes

Date Written: January 8, 2010

Abstract

The house-money effect – people’s tendency to be more daring with easily-gotten money – is a behavioral pattern that poses questions about the external validity of experiments in economics: to what extent do people behave in experiments like they would have in a real-life situation, given that they play with easily-gotten house money? We ran an economic experiment with 66 students to measure the house-money effect on their risk preferences. They received an amount of money with which they made risky decisions involving losses and gains; a treatment group got the money 21 days in advance and a control group got it the day of the experiment. We find that, when facing possible losses, people in the treatment group showed a lower tolerance to risk than people in the control group. If the players are assumed to have a CRRA utility function and to behave according to expected-utility theory, the risk-attitude adjustment corresponds to an average increase of 1 in their risk aversion coefficient. While the exact pattern of this house-money adjustment differs by gender, it is not possible to determine the sign of this gender effect unambiguously. In any case, it is advisable to include credible controls for the house-money effect in experimental work in economics.

Keywords: House-Money Effect, Risk Aversion, Prospect Theory, Economic Experiment, External Validity

JEL Classification: C91, D03, D81

Suggested Citation

Martinez, Luis and Jaramillo, Christian R. and de Roux, Nicolás and Cárdenas, Juan-Camilo, It’s Not My Money: An Experiment on Risk Aversion and the House-Money Effect (January 8, 2010). Documento CEDE No. 2010-02, Available at SSRN: https://ssrn.com/abstract=1554443 or http://dx.doi.org/10.2139/ssrn.1554443

Luis Martinez (Contact Author)

University of Chicago - Harris School of Public Policy ( email )

1155 East 60th Street
Chicago, IL 60637
United States

Christian R. Jaramillo

Universidad de los Andes ( email )

Cra 1 No 18A-10
Of. 310 Ed. A
Bogotá
Colombia
(+57 1) 339 4949 x 2439 (Phone)
332 4021 (Fax)

HOME PAGE: http://economia.uniandes.edu.co/html/home/home.php

Nicolás De Roux

Universidad de los Andes - Department of Economics ( email )

Carrera 1a No. 18A-10
Bogota, AA4976
Colombia

Juan-Camilo Cárdenas

Universidad de Los Andes ( email )

Carrera 1a No. 18A-10
Santafe de Bogota, AA4976
Colombia
339-4949 ext. 2473 (Phone)

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