The House Money Effect

Investors who have experienced a gain or profit are often willing to take more risk. Gamblers call this “playing with the house’s money.” Since they don’t yet consider the money to be their own, they are willing to take more risk with it.

The house money effect predicts investors will be more likely to purchase risky stocks after closing out a profitable trade.  Behavioral finance theory suggests that overcoming this bias may help investors profit more over the long term.

Source: Psychology of Investing, The (2nd Edition)

For more information, see all articles on: Behavioral Finance

See also:
  • Integrating Losses and Separating Gains
  • Equity Returns at the Turn of the Month
  • Performance Attribution for Fixed Income Managers
  • Money-Weighted Rate of Return
  • What is a Stock Worth? Part 1 – The Time Value of Money
  • Technical Analysis Explained : The Successful Investor's Guide to Spotting Investment Trends and Turning Points

    The Intelligent Investor: The Classic Text on Value Investing

    Financial Statement Analysis: A Practitioner's Guide, 3rd Edition

    Managing Investment Portfolios: A Dynamic Process (CFA Institute Investment Series)

    Leave a Reply

    You must be logged in to post a comment.