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MENTAL MODEL · M2766

House Money Effect

House Money Effect
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Updated 2026-07-31

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INTRODUCTION

English translation pending.

CORE DEFINITION

The house money effect, described by Richard Thaler and Eric Johnson, holds that people become more willing to gamble with recently won money than with their original stake. Because winnings are mentally booked as the casino's money rather than one's own, the perceived cost of losing them feels lower. The effect links mental accounting with loss aversion and helps explain why risk appetite rises after a run of gains, in gambling, trading and corporate investment alike.

SCAFFOLDING EFFECT

psychology

Reduce cognitive load

- Risk audit: Notice when a bonus or windfall makes you spend and bet more freely than usual. - Account merge: Treat gains as fungible with principal, since their marginal value is identical. - Streak warning: Raise scrutiny of decisions made right after a run of profits.

anchor

Anchor fast decisions

Windfalls are booked in a separate mental account from principal, so losses drawn from that account feel like giving back someone else's money rather than losing your own. Because loss aversion is measured against the reference point of the account, the perceived downside shrinks and the acceptable bet size grows. The distortion lies not in the money but in the accounting.

MINIMUM ACTION

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Source support: Explicit

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