The house money effect on investment risk taking: Evidence from Taiwan

Abstract

This paper investigates the effect of house money on the risk taking behavior of individual investors. When gains are more substantial, individuals tend to take greater risk. The house money effect seems to decline over time because the propensity for risk taking following gains is diminished with time. This study shows that when evaluating investment gains, the reference points for investors are adapted over time, with the current salient reference point being the highest stock price attained at a given time in the past. The empirical evidence suggests that the house money effect is actually discernible in the real world financial markets and not just in artificial laboratory experiments.