It's just winnings, so it's fine—The 'House Money' trap in behavioral economics [Investment x Psychology]
The day I felt bold because of my winnings
My first trade of the morning went perfectly.
The valuation of my brokerage account increased instantly, and I took a sip of my coffee.
“Alright, I’ve got the momentum today!”
—Thirty minutes later, I opened a position in a “stock I didn't know well,” and by noon, I had wiped out almost all of my morning gains.
Looking back, I wasn't looking at the charts, but at my “emotional balance.”
“It’s just what I won earlier, so it’s fine if I lose a little.”
Today, I’m talking about this illusion—the
house money effect.
The movement of the mind when positions expand
That day, I was a little different from my usual self.
While I said, “Profit is profit, I have to protect it properly,”
somewhere in my heart, I was treating my winnings lightly, thinking, “My principal hasn't decreased.”
Even when I incurred losses, I consoled myself by thinking, “The profit from earlier is still there.”
In reality, there was no need to take on new risks here.
Even so, groundless reasons like “I won earlier” or “I’m lucky today” were pushing me forward without me realizing it.
Before I knew it, I think I was looking at the market not with the risk of my entire assets in mind, but with the feeling that “I’m just playing with today’s winnings.”
The psychology behind it—The House Money Effect
This mental habit of feeling that “it’s fine because it’s winnings” is called the house money effect in behavioral economics.
Money won at a casino (house money) is easily felt as “not coming out of my own pocket,” and people tend to bet more boldly than usual with that amount.
It is the same in investing,
profits gained from the previous trade,
“surplus” that happened to go well this year,
positions with large unrealized gains,
and so on, the more we feel that these are “money separate from the principal,” the more insensitive we tend to become to risk.
However, every cent in the account is the same one cent. Even if it is winnings, if it decreases, your future options will definitely shrink.
Even so, by labeling it as “winnings” or “extra money,” we end up feeling that the weight of that money is a little lighter.
Countermeasures for the House Money trap
Since it is difficult to eliminate the house money effect entirely, I try to keep only the following three things in mind.
① Try linking your winnings to a 'different purpose'
Decide on one specific use for the money, saying, 'Today's profit is part of what I need for X in the future.'
It could be travel funds or retirement savings; it doesn't matter.The moment you attach a purpose to it, that money suddenly feels more significant.
② Decide on your 'risk limit' for the day in advance
Before trading, I decide, 'Today, I will only risk up to X amount of this profit.'
I have a personal rule that once I hit that line, I stop for the day, even if I am winning.
③ Make time to look at your total profit/loss graph
Instead of looking at 'how much I won today,' I make time to look at 'how my asset curve has moved over the past six months to a year.'
When you shift your focus from 'today' to the 'big picture,' it becomes a little easier to realize that everything, including your winnings, is 'your own money.'
As a small first step you can take today,try writing down just one line about 'what you want to use the profit from your most recent winning trade for'and that should be enough.
Summary in one sentence: Winnings are also 'your own money'
Winnings can sometimes feel a bit light.
However, what supports your future life is a single pool of assets that does not distinguish between 'principal' and 'winnings.'
Winnings are also 'money that can buy your future time.'
I believe that whether or not you can think of it that way will gradually change how you take risks.
To everyone who has read this far
Have you ever had the experience of betting more than usual because you thought, 'It's okay because it's winnings'?
If you'd like, I would be happy if you could share in the comments a time when you felt the 'house money' effect.
I am also still continuing to invest while learning to manage this feeling. It would be very helpful for me to hear from you (^-^)
■ Related notes
・Immediately after a loss“reaching out”──The psychology of revenge trading and how to distance yourself [Investing×Psychology]
・Investment Psychology Dictionary:FOMO(Fear of Missing Out)──When you feel like 'if I don't get in now, I'll be left behind'