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Gambling with the House Money and Trying to Break Even: The Effects of Prior Outcomes on Risky Choice
TLDR
In this article, the authors consider how prior outcomes are combined with the potential payoffs offered by current choices, and propose an editing rule to describe how decision makers frame such problems. And they also present data from real money experiments supporting a "house money effect" (increased risk seeking in the presence of a prior gain) and "break-even effects" (that outcomes which offer a chance to break even are especially attractive).Abstract:
How is risk-taking affected by prior gains and losses? While normative theory implores decision makers to only consider incremental outcomes, real decision makers are influenced by prior outcomes. We first consider how prior outcomes are combined with the potential payoffs offered by current choices. We propose an editing rule to describe how decision makers frame such problems. We also present data from real money experiments supporting a "house money effect" (increased risk seeking in the presence of a prior gain) and "break-even effects" (in the presence of prior losses, outcomes which offer a chance to break even are especially attractive).read more
Citations
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References
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Journal ArticleDOI
The Framing of Decisions and the Psychology of Choice
Amos Tversky,Daniel Kahneman +1 more
TL;DR: The psychological principles that govern the perception of decision problems and the evaluation of probabilities and outcomes produce predictable shifts of preference when the same problem is framed in different ways.
Journal ArticleDOI
Toward a positive theory of consumer choice
TL;DR: The economic theory of the consumer is a combination of positive and normative theories as discussed by the authors, which describes how consumers should choose, but it is also described how they do choose, and in certain well-defined situations many consumers act in a manner that is inconsistent with economic theory.
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The Hubris Hypothesis of Corporate Takeovers
TL;DR: The hubris hypothesis is advanced as an explanation of corporate takeovers by Jensen and Ruback as mentioned in this paper, who argued that the evidence supports the hubris hypotheses as much as it supports other explanations such as taxes, synergy, and inefficient target management.
Journal ArticleDOI
The Psychology of Sunk Cost
Hal R. Arkes,Catherine Blumer +1 more
TL;DR: Kahneman and Tversky as mentioned in this paper found that those who incurred a sunk cost inflated their estimate of how likely a project was to succeed compared to the estimates of the same project by those who had not incurred a sink cost.
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Knee-deep in the Big Muddy: A study of escalating commitment to a chosen course of action.
TL;DR: In this paper, the authors examined the process of escalating commitment through the simulation of a business investment decision and found that persons committed the greatest amount of resources to a previously chosen course of action when they were personally responsible for negative consequences.