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

Published online by Cambridge University Press:  14 March 2025

Juan Camilo Cárdenas ,
Nicolas De Roux ,
Christian R. Jaramillo  and
Luis Roberto Martinez
Juan Camilo Cárdenas*
Affiliation:
Facultad de Economía & CEDE, Universidad de Los Andes, Bogotá, Colombia
Nicolas De Roux*
Affiliation:
Department of Economics, Columbia University, New York, USA
Christian R. Jaramillo*
Affiliation:
Dirección de Impuestos y Aduanas Nacionales—DIAN, Bogotá, Colombia
Luis Roberto Martinez*
Affiliation:
Department of Economics & STICERD, London School of Economics, London, UK
*
jccarden@uniandes.edu.co
nd2282@columbia.edu
ch.jaramillo.econ@gmail.com
l.r.martinez@lse.ac.uk
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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.

Keywords

House-money effectRisk aversionProspect theoryEconomic experimentExternal validity
Type
Manuscript
Information
Experimental Economics , Volume 17 , Issue 1 , March 2014 , pp. 47 - 60
Copyright
Copyright © 2013 Economic Science Association

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Footnotes

Electronic Supplementary Material The online version of this article (doi:https://doi.org/10.1007/s10683-013-9356-x) contains supplementary material, which is available to authorized users.

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