concertrate Posted July 23, 2019 #1 Posted July 23, 2019 Here goes Part 1, enjoy! What Is the House Money Effect? Investopedia gives us the following defintion with reference to financial markets and investors: Quote The house money effect explains the tendency of investors and traders to take on greater risk when reinvesting profit earned via stocks, bonds, futures or options than they would when investing their savings or a portion of their wages. This effect presumes that some investors will increase their risk in a given trade by the use of mental accounting when they perceive they are risking money they didn't have previously, but have gained through their interaction with the market. It is clear that this bias is derived from gambling and I have personally found this bias present in my own behaviour. So in this case it is less of a behavioural finance bias present in gambling, but the other way around. Understanding the House Money Effect Cornell University researchers Thaler and Johnson borrowed from gambling when they first defined the “house money effect”. The refers to a gambler who takes profit from winning bets and uses some or all of them in the bets following this win. Based on this, traders were found to make riskier trades than usual after making profitable trades. In simple terms, once the investors get a taste of a win, they chase a bigger win and don't mind taking on additional risk because they don't have the same mental attachment to the profits as they do with the original capital (balance). According to various sources, trades where there is a significant or unexpectedly large profit may also give rise to this effect. To relate this to stake, imagine hitting a 1million+ multi on Crash only because you forgot to set your cashout and let it run accidentally to that level. The tendency would be to then make similarly risky bets off the back of this massive win in the hopes of making similarly out-sized profits. We have also seen some people get badly burnt with employee stock options in multiple cases (most recently think DotCom, Enron, Steinhoff, etc. ) where some employees don't exercise their options and diversifying their portfolios and instead double down and don't cash out because of the historical performance of the options. This can also be related to the bitcoin bull runs we see increasingly regularly where BTC millionaires lose out on significant profits because they are using "house money". Summary Investors or players are willing to take on more risk when they win and is attributed to the investor or player's mindset that the profit is money they didn't have before and would be okay to risk. So in our case, we chase higher multipliers or increase our stake (pun intended) size when we play with our profits/tips/rain/rakeback etc. Prevention To prevent us ploughing all our profits back in, we could follow two options: Stick to our usual strategy and playing style, or be a bit more conservative (lower risk) in our play. At least for a little bit until the desire to chase wears off. Personal experience In my personal experience I have been in a situation where I won about 4btc from a jackpot and proceeded to plough most of this back in trying to chase another one. Keen to hear your thoughts and feedback. Let me know in the comments if you found this informative, whether you like the format and what improvements I should make to improve.
Enzo Posted July 23, 2019 #2 Posted July 23, 2019 Very intriguing article thanks for the detailed explanation, I do recall your post where you asked us if we wanted to hear more. Glad you followed up with this.
concertrate Posted July 23, 2019 Author #3 Posted July 23, 2019 Thank you @Enzo I appreciate the feedback and will keep them coming for as long as I can. Keep an eye out for the next ones
polor12 Posted July 23, 2019 #4 Posted July 23, 2019 um you saying that the way we act can determine if we win or not.. if so then i can say that is just false and no factional reason is being stated on that whole entire section
nikowin88 Posted July 23, 2019 #5 Posted July 23, 2019 Thank ks for sharing this! I already observed I was subject to that behavior but didn't knew it was known behavior. I would love to read more about that kind of subject and I'll start doing so em research about those subject I find truly interesting Thanks for sharimg
concertrate Posted July 23, 2019 Author #6 Posted July 23, 2019 4 hours ago, polor12 said: um you saying that the way we act can determine if we win or not.. if so then i can say that is just false and no factional reason is being stated on that whole entire section Not at all @polor12 These are just behavioral biases. Things which we do that do not always make sense. This series is not about how to win or "beat the system", but more about creating awareness about certain behaviors which we may fall prey to. It's not aimed at making anyone profit per say, but it's aimed at helping us identify where our actions are based on certain psychological or cognitive biases. Hope this clarifies...
CntryBoy Posted July 24, 2019 #7 Posted July 24, 2019 Very interesting read! I have also noticed some similarities in myself. Looking forward to the other parts to come.
wry Posted July 24, 2019 #8 Posted July 24, 2019 Kudos on a nice effort to make a high quality post! I've heard of this but you laid it out very nicely. I am a big believer in setting a win target and if I'm lucky enough to hit it, time to quit it! That way it's easier to avoid the effects of the house money effect.
williamshennie9 Posted July 25, 2019 #9 Posted July 25, 2019 That makes a lot of sense actually, and I can relate as well. I would never gamble more than a certain percentage of my income, but when I win big, I would use those winnings to make bigger bets. Thanks for this great, and insightful post!
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