How Do Prior Outcomes Affect Risky Choice? Further Evidence on the House-Money Effect and Escalation of Commitment

Abstract

Abstract: In an experiment we study the influence of prior outcomes on risky choice. We document a strong framing effect. By manipulating the presentation format of the decision problem we can induce increased risk taking following a gain, i.e. the house-money effect (Thaler and Johnson 1990) or, alternatively, increased risk taking following a loss, i.e. escalation of commitment (Staw 1976). Maximization of a value function from prospect theory can explain some of our results. Escalation of commitment in our experiment does not appear to be driven by a need to justify or rationalize the initial decision. JEL code: C91 We gratefully acknowledge financial support from the Deutsche Forschungsgemeinschaft, through SFB504 and the Graduiertenkolleg at Mannheim, and from the European Commission through the RTN “Understanding Financial Architecture ” at Toulouse. We received helpful comments from participants of the

Cite this work

No public copy is stored for this record, so only the metadata is cited.

Stored only when both papers are in the corpus — 3 citations exist upstream.