Decision Analysis · 2005 · 190 citations · 21 references
BusinessDecision SciencesEconomicsBehavioral EconomicsDecision TheoryExperimental EconomicsBehavioral Decision-makingDecision Under RiskInvestor PsychologyProspect TheoryRisk PreferencesRisk-sensitive Decision MakingContradictory EvidenceExperimental Risk TakingExperimental Study DesignFinancial Risk AttitudesPortfolio Choice Under RiskPortfolio Decision-makingProspect Theory ApplicationsRisk Preference Modeling
Prior research shows a house‑money effect where gains increase risk taking, while escalation of commitment suggests losses also raise risk taking. The study investigates how prior gains versus losses influence risk taking, aiming to resolve the apparent contradiction between the two effects. The authors manipulate the decision problem’s presentation format to induce both house‑money and escalation of commitment behaviors. They find that a portfolio‑style presentation elicits higher risk after losses (escalation of commitment), whereas a two‑stage betting game elicits higher risk after gains (house‑money effect), with prospect‑theory explaining part of the pattern and suggesting that escalation is not driven by justification, highlighting implications for multi‑period investment risk modeling.
When making sequential decisions, do prior gains induce more or less risk taking than prior losses? Prior studies have found evidence for a house-money effect, where risk taking increases following gains. These studies also found seemingly contradictory evidence for escalation of commitment, where risk taking increases following losses. We present an experimental study investigating this apparent contradiction. By manipulating the presentation format of a decision problem we can induce both types of behavior. When the problem is presented as a portfolio decision, risk taking is greater following losses than following gains, consistent with escalation of commitment. When the problem is presented as a two-stage betting game, risk taking is greater following gains than following losses, consistent with the house-money effect. Some of these results can be accounted for using the prospect-theory value function. Escalation of commitment in our experiment does not appear to be driven by a need to justify or rationalize the initial decision. These results are potentially relevant to modeling risk preference in multiperiod investment decisions.
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