Does Getting Free Money Change Our Behavior?

George | July 11, 2018

Imagine that you walked into a casino, dropped a quarter into the first slot machine you saw and hit the $100 jackpot! Would this outcome change your gambling behavior for the rest of the evening? This was a theoretical question posed by the Nobel-award-winning academic and economist Richard Thaler when he researched what would become known as the house money effect.

When is a $100 not a $100?

As economists, Thaler and his research partner, Eric Johnson, knew what the answer ought to be. Irrespective of how you came by the cash — by glorious good fortune as in this case or by hours of back-breaking work — $100 is always worth $100. So, it should always be treated in the same way. Still, the results of their research revealed that most people do not think like that. For many of us, the hard-earned cash is to be handled with respect, spent judiciously or invested prudently. The coins that tumbled out of the slot machine, in contrast, can be squandered with frivolous abandon.

Of course, there is nothing wrong with celebrating one’s good fortune. However, the house money effect could have some crucial implications if your other activities at the casino include a few hands at the poker table. The presence of free money could encourage you to take more risks than you would otherwise. As neither the table nor the other players know or care where your cash came from, being less prudent in your risk judgments would put you at a particular disadvantage.

Free money everywhere

You might never be as fortunate as the slot machine player in the theoretical situation above, but you will probably have the opportunity to get your hands on some free money nonetheless. Many online casino sites offer bonuses to attract new members. So, your free money could come as a bonus in the tens or hundreds of dollars or as a revolutionary online poker site did earlier this year, a bonanza of five million CHPs, a cryptocurrency. Indeed, the prospect of this windfall might be one of the most significant factors influencing the choice of casino site. Thus, the free money is not only available, it is often the focus of attention.

So, how can one avoid falling victim to the house money effect? Well, the spendthrift tendency arises because we have not mentally counted the free money as part of our wealth. The same effect emerges whenever we experience any sudden and unexpected gain. It is not yet our money, it is still somebody else’s money. It is the slot machine’s money. It is the other players’ money. It is the house’s money. As soon as we get used to our new level of wealth, however, we begin to treat those dollars as we would any other in our pocket. So, the secret is to give yourself some time. Enjoy seeing the windfall cash in your account, but do not spend it right away. Leave it there until you get used to seeing your swollen account balance. Then, you can start playing with your usual rigor.