House Money Effect
Taking greater risks with money regarded as winnings than with money regarded as one's own.
How it is identified
Test: risk tolerance rises after gains, treating profits as a separate account with lower value
Unit
qualitative
In depth
A form of mental accounting, the house money effect treats profits as belonging to the market rather than to the investor, which makes losing them feel less like a loss. Every rupee of profit is exactly as much money as every rupee of capital, and a portfolio does not know which is which. Its practical consequence is escalating risk after a winning run, which coincides with rising overconfidence and usually with a market that has become more expensive. Periodically withdrawing profits, or simply recomputing position sizes against the current total, removes the distinction the effect depends on.
Worked example
An investor turns ₹5,00,000 into ₹8,00,000 and risks the ₹3,00,000 gain aggressively. Losing it takes the portfolio back to ₹5,00,000 — a 37.5% drawdown from the peak, whatever it is called.
Illustrative figures, chosen so the arithmetic is easy to follow. Not a live price and not a valuation of any company.
Educational reference only
This entry explains what “House Money Effect” means. It is not investment advice and not a recommendation to buy or sell any security. Any numbers above are illustrative, not live prices, and nothing here predicts price direction or rates a stock. Consider your own circumstances and consult a SEBI-registered investment adviser before acting.