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Is it my money or not?: an experiment on risk aversion and the house-money effect

Cárdenas, Juan Camilo, Roux, Nicolas, Jaramillo, Christian R. and Martinez, Luis Roberto (2014) Is it my money or not?: an experiment on risk aversion and the house-money effect. Experimental Economics, 17 (1). pp. 47-60. ISSN 1386-4157

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Identification Number: 10.1007/s10683-013-9356-x

Abstract

The house-money effect, understood as 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 122 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 randomly selected treatment group received the money 21 days in advance and a control group got it the day of the experiment. From a simple calculation we found that participants in the treatment group only spent on average approximately 35 % of their cash in advance. The data confirms the well documented results that men are more tolerant to risk than women, and that individuals in general are more risk tolerant towards losses than towards gains. With our preferred specification, we find a mean CRRA risk aversion coefficient of 0.34, with a standard deviation of 0.09. Furthermore, if subjects in the treatment group spent 35 % of the endowment their CRRA risk aversion coefficient is higher than that of the control group by approximately 0.3 standard deviations. We interpret this result as evidence of a small and indirect house money effect operating though the amount of the cash in advance that was actually spent. We conclude that the house money effect may play a small role in decisions under uncertainty, especially when involving losses. Our novel design, however, could be used for other domains of decision making both in the lab and for calibration of economic models used in micro and macroeconomics.

Item Type: Article
Official URL: http://link.springer.com/journal/10683
Additional Information: © 2013 Economic Science Association
Divisions: Economics
Subjects: H Social Sciences > HB Economic Theory
JEL classification: C - Mathematical and Quantitative Methods > C9 - Design of Experiments > C91 - Laboratory, Individual Behavior
D - Microeconomics > D1 - Household Behavior and Family Economics > D12 - Consumer Economics: Empirical Analysis
D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D81 - Criteria for Decision-Making under Risk and Uncertainty
Sets: Departments > Economics
Collections > Economists Online
Date Deposited: 27 Mar 2013 15:20
Last Modified: 20 Jul 2019 01:50
Funders: Centro de Estudios Interdisciplinarios Basicos y Aplicados
URI: http://eprints.lse.ac.uk/id/eprint/49527

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