The house money effect and the choice of investment - An experimental study from Vietnam

Abstract

This study uses the software approach in order to create an experimental market where participants’ investment data is collected. We then used this data to prove the relationship between the House Money Effect and several well-known behavioral theories. We found out that there is a strong influence of the Prospect Theory, and a weak influence of windfall gains on the House Money Effect. Sunk costs and mental accounting does not seem to contribute to the occurrence of the House Money Effect. We have examined whether individuals with certain personal traits will be more exposed to the House Money Effect: Age, gender, and investing experience all have a relationship with the frequency of the House Money Effect. Breadwinners experience the House Money Effect more often than the others. There is an unclear relationship between family size and the House Money Effect, and there is no connection found between income levels with the House Money Effect. Through this study, we hope to contribute to the society by encouraging policy makers to increase financial education among Vietnamese, and to revise their decisions based on better understanding of Vietnamese investors. We believe to have also contributed to academia by endorsing the use of software simulations. Keywords: House Money Effect, Prospect Theory, Theory of windfall gains, personal traits, software simulation.