House money effect
We take bigger risks with money we've just won than with our own.
What it means
The house money effect is the tendency to become more willing to take risks after a prior gain, as people mentally segregate their winnings from their initial wealth and treat them as the casino's money rather than their own. The mechanism is a dynamic shift in the reference point combined with mental accounting: a recent windfall is filed in a separate account whose potential loss is felt less acutely, temporarily loosening the grip of loss aversion. It demonstrates that risk preferences are not fixed traits but adjust with the path of recent outcomes — a key qualification to any model that assumes stable attitudes toward risk. An important counterpart is that prior losses can have the opposite or a complex effect (such as the 'break-even' urge to gamble back to whole), so prior outcomes shape current risk-taking in path-dependent ways. It matters wherever sequential decisions under risk occur — gambling, trading, and corporate reinvestment of unexpected profits — because earlier success can quietly erode the caution that later decisions deserve.
Examples
A gambler up $200 early in the night bets that windfall far more freely than the original $200 he walked in with — and often gives it all back.
An investor whose shares double rolls the whole profit into a speculative bet she would never fund from her salary — the gain feels like the market's money, not hers.
After a surprise windfall quarter, a board green-lights the risky venture it rejected last year, when the identical sum would have had to come out of the core budget.
First described in Thaler & Johnson (1990).