Playing it safe with the house money – evaluating the break even and house money effects using horse race betting data
Session Title
Session 1-3-E: Gambling and Risk Taking
Presentation Type
Paper Presentation
Location
Park MGM, Las Vegas, NV
Start Date
23-5-2023 1:45 PM
End Date
23-5-2023 3:15 PM
Disciplines
Behavioral Economics | Cognitive Science | Social Psychology
Abstract
In financial risk-taking, decisions are heavily influenced by past outcomes. The house money effect and breaking even effect (also known as chasing losses) are well-known phenomena in behavioral economics, and they suggest that an individual’s risk-taking increases following a win or a loss, respectively. Previous research has found support for both effects, but the boundary conditions for which effect takes precedence and when are unclear. We combined data from a large online horse betting panel dataset, comprehensive administrative population registry, and intelligence tests, and found support for the house money effect: Controlling for demographics and IQ, horse betting losses on the previous day increased betting amounts on the following betting day. We did not observe the breaking even effect, or any clear moderating effects for IQ, but instead found a playing safe effect: losing on a previous day decreased bet sizes on the following betting day and increased the time-period between two consequent betting sessions. We also observed a cooling off effect whereby the breaking even- and playing safe effects attenuated with increasing time-period between consecutive betting days. Our findings are novel, as they involve authentic financial risk-taking in a natural setting, with demographics and IQ as control variables, using large datasets. I will discuss these findings in relation to theories in behavioral economics and suggest explanations for when and why real-life losses lead to changes in risk-taking.
Keywords
Risk-taking, Decision-making, Horse betting, House money -effect, Breaking even -effect, Chasing losses
Funding Sources
Academy of Finland (grant #331102 to Niko Suhonen)
Competing Interests
None
Playing it safe with the house money – evaluating the break even and house money effects using horse race betting data
Park MGM, Las Vegas, NV
In financial risk-taking, decisions are heavily influenced by past outcomes. The house money effect and breaking even effect (also known as chasing losses) are well-known phenomena in behavioral economics, and they suggest that an individual’s risk-taking increases following a win or a loss, respectively. Previous research has found support for both effects, but the boundary conditions for which effect takes precedence and when are unclear. We combined data from a large online horse betting panel dataset, comprehensive administrative population registry, and intelligence tests, and found support for the house money effect: Controlling for demographics and IQ, horse betting losses on the previous day increased betting amounts on the following betting day. We did not observe the breaking even effect, or any clear moderating effects for IQ, but instead found a playing safe effect: losing on a previous day decreased bet sizes on the following betting day and increased the time-period between two consequent betting sessions. We also observed a cooling off effect whereby the breaking even- and playing safe effects attenuated with increasing time-period between consecutive betting days. Our findings are novel, as they involve authentic financial risk-taking in a natural setting, with demographics and IQ as control variables, using large datasets. I will discuss these findings in relation to theories in behavioral economics and suggest explanations for when and why real-life losses lead to changes in risk-taking.
