The House Money Effect
View profits as 'house money'
The House Money Effect is a phenomenon where investors view their profits as 'house money', not their own money. This leads to risk-seeking behavior and a tendency to take unnecessary risks. The effect is driven by the fact that investors feel they haven't really lost anything if they lose their profits.
- Investors tend to view profits as 'house money', not their own money.
- This leads to risk-seeking behavior and a tendency to take unnecessary risks.
- The House Money Effect is driven by the fact that investors feel they haven't really lost anything if they lose their profits.
- Recognize the House Money EffectBe aware of the tendency to view profits as 'house money' and take unnecessary risks.Pro tipTake a step back and assess your investment decisions objectively.WarningFailing to recognize the House Money Effect can lead to significant losses.
- Assess Your Investment DecisionsEvaluate your investment decisions and identify areas where you may be taking unnecessary risks.Pro tipConsider seeking the advice of a financial advisor or investment professional.WarningFailing to assess your investment decisions can lead to poor outcomes.
Investor Takes Unnecessary Risks
An investor views their profits as 'house money' and takes unnecessary risks, leading to significant losses.
OutcomeThe investor suffers significant losses and regrets their decision.
Failing to Recognize the House Money Effect
Not being aware of the tendency to view profits as 'house money' and take unnecessary risks.
Taking Unnecessary Risks
Taking risks that are not justified by the potential returns.
The House Money Effect was first identified by researchers Mike Thaler and Eric Johnson. They found that once a person has sold a winner, their behavior turns from being driven by risk-avoidance to risk-seeking.
Source · BOOK
The Art of Execution