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: | Johnson Eric J., Thaler Richard H. |
Keywords: | decision theory, values |
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).