SFB 504 discussion paper 01-48

Martin Weber
Lehrstuhl für ABWL, Finanzwirtschaft, insb. Bankbetriebslehre
L 5, 2, D-68131 Mannheim

Heiko Zuchel
Universität Mannheim, Graduiertenkolleg Allokation auf Finanz- und Gütermärkten
D-68131 Mannheim

How Do Prior Outcomes Affect Risky Choice? Further Evidence on the House-Money Effect and Escalation of Commitment

In an experiment we study the influence of prior outcomes on risky choice. We document a strong framing effect. By manipulating the presentation format of the decision problem we can induce increased risk taking following a gain, i.e. the house-money effect (Thaler and Johnson 1990) or, alternatively, increased risk taking following a loss, i.e. escalation of commitment (Staw 1976). Maximization of a value function from prospect theory can explain some of our results. Escalation of commitment in our experiment does not appear to be driven by a need to justify or rationalize the initial decision.
B4 Weber
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Decision Analysis, Vol. 2, No. 1. März 2005, S. 30-43
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