Gambling with the house money and trying to break even: The effects of prior outcomes on risky choice

Gambling with the house money and trying to break even: The effects of prior outcomes on risky choice

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Article ID: iaor199113
Country: United States
Volume: 36
Issue: 6
Start Page Number: 643
End Page Number: 660
Publication Date: Jun 1990
Journal: Management Science
Authors: ,
Keywords: decision theory, values
Abstract:

How is risk-taking affected by prior gains and losses? While normative theory implores decision makers to only consider incremental outcomes, real decision makers are influenced by prior outcomes. The authors first consider how prior outcomes are combined with the potential payoffs offered by current choices. They propose an editing rule to describe how decision makers frame such problems. The authors also present data from real money experiments supporting a ‘house money effect’ (increased risk seeking in the presence of a prior gain) and ‘break-even effects’ (in the presence of prior losses, outcomes which offer a chance to break even are especially attractive).

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