House Money Effect
Richard H. Thaler and Eric J. Johnson of the Cornell University Johnson Graduate School of Management first defined the “house money effect,” borrowing the term from casinos.1 The term makes reference to a gambler who takes winnings from previous bets and uses some or all of them in subsequent bets.

The house money effect suggests, for example, that individuals tend to buy higher-risk stocks or other assets after profitable trades. For example, after earning a short-term profit from a stock with a beta of 1.5, it’s not uncommon for an investor to next trade a stock with a beta of 2 or more. This is because the recent successful outcome in trading the first stock with above-average risk temporarily increases the investor’s risk tolerance. Thus, this investor next seeks even more risk.


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