The Origin of Gains Matters: A Comparative Analysis of the House Money and Windfall Effects in Investment Decisions

Abstract

Thaler's "mental accounting theory" posits that people tend to favor high-risk investments when they receive unexpected money (such as gambling winnings), a phenomenon known as the "house money effect.". However, gambling gains are risky and are essentially risk-return, while gains without any risk should be called "windfalls". Most current studies tend to refer to the two types of benefits as "windfall", which will lead to confusion between the concepts of "house money effect" and "windfall effect", which is obviously not accurate enough. This article reviews recent literature on the "house money effect" and "windfall effect" to distinguish the impact of different risk-return strategies on investors' risk preferences. The result show that the investors are more inclined to invest in high-risk investments After analysis they receive risk-free returns, while the effects of risk-return strategies on investor risk preferences are insignificant. This suggests that the "windfall effect" exists, but the "house money effect" is negligible.