The "Windfall Gain" Effect: Why Do You Tend to Go All-In After Making Money?

2024.10.24

The "Windfall Gain" Effect: Why Do You Tend to Go All-In After Making Money?

You might be more willing to make larger bets with money that was easily earned (because it came easily).

2024.10.24 - 02:34:25

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You might be more willing to make larger bets with money that was easily earned (because it came easily).

Author: Route 2 FI

Translation: TechFlow

Today, I want to talk about the "house money effect."

The "house money effect" is a phenomenon in behavioral finance where investors become more willing to take risks after making gains, because they view these profits as "house money"—not their own hard-earned capital.

This idea comes from gambling: when gamblers win money, they often feel like they're playing with the casino's money, so they take bigger risks than they would with their original stake.

Feel free to share your thoughts on this.

House Money

Everything has its pros and cons.

Have you heard of the concept of "house money"? In gambling, due to cognitive bias, players tend to take greater risks when using winnings rather than their initial stake. This is because they perceive the profits as still belonging to the house, not themselves.

Here’s a simple example: suppose you start with $10,000 and double it trading $DOGE to $20,000. Research shows people are much less cautious when spending that extra $10,000 compared to their original capital. This mindset is understandable—but also one I frequently fall into.

When it comes to "house money," we’re far less frugal than with hard-earned income. Because the money came easily, we’re more inclined to spend it. Obviously, this thinking isn’t rational—regardless of how money is obtained, its value is the same.

One dollar has the same real-world value whether earned through hard work or won by luck. Yet people assign different psychological values to it and behave differently when risking it. Is there any benefit to this cognitive bias? In my view, yes. It allows us to take on more risk, potentially leading to greater rewards. You might be more willing to make a big bet with money that came easily.

What if we applied this bias to another, even more important kind of "currency"? What about time?

In fact, I discussed this recently on Twitter:

If you’re 25 now and expect to live another 55 years, that sounds like a lot. But remember: as you age, your health declines, so those years shouldn’t be treated equally.

For example:

25–30: quality of life 10/10
30–35: quality of life 9/10
35–40: quality of life 8/10
40–45: quality of life 7/10

If you're reading this at age 40, it doesn't mean your current quality of life is 7/10. You should treat your present moment as 10/10 and build your standard accordingly.

My point is: too many people delay doing what they truly want, only to find their health deteriorating later. You don’t want to face regret at the end of life.

You can read this and say “screw you, Route,” or you can let it inspire you to live boldly. Don’t be a victim of your own life. You only get one shot—seize the opportunities. The worst-case scenario might not be as bad as you think.

Suppose you knew you’d die at 80.

If you’re 25 now, you have 55 years left; if you’re 40, you have 40 years.

Now, let’s apply the “house money” concept to time.

Imagine someone just gave you an extra year—you could pause your life and use that year exactly as you wish.

That makes it 80 plus one.

Would having that extra year change how you live? I know that if I weren’t retired yet, I’d definitely use that year to travel, pursue passions, start a business, explore freely—things I wouldn’t have time for in a 9-to-5 job, without pressure to earn money.

Maybe your goals differ, but I struggle to imagine anyone using an extra year solely to chase wealth or fame. In such a case, the wisest move would be to do what we normally hesitate to try.

This leads me to wonder further: if you know what makes you happy, why not do it now? What are you afraid of? What’s really holding you back—is it external, or just a mental barrier?

Perception of Time

Time is a resource we can never reclaim, so we must manage it carefully.

We’re constantly told to excel academically, get into top schools, and study fields that lead to high-paying jobs.

If you feel bored, go deeper—get a master’s degree to earn even more. Rarely do we pause to reflect and discover our true passions, because doing so might disrupt the path we’re supposed to follow.

At least in the Western world, many people feel this pressure.

Most of our youth and early adulthood seems spent striving for a luxurious corner office with a window in a skyscraper, rarely questioning whether this actually makes our time meaningful.

We assume this path is low-risk, but isn’t that itself a risk?

Isn’t living by others’ goals instead of our own the greatest risk of all?

We spend precious time on things we may not genuinely value. So we keep chasing money, efficiency, and success—even sacrificing time—regardless of whether these achievements align with who we truly are.

Because society sees accumulating achievements as a sign of success, while accumulating experiences is not.

We’d rather trade time for something that might have value than spend it on the unknown. Exploration isn’t seen as an option—because in our culture, exploring purely for exploration’s sake is considered insufficiently “productive.”

This slowly erases wonder and curiosity from our lives, draining our passion for living.

The truth is, none of us knows how long we’ll live. So why not treat one year—or two, or five—as bonus time? Like house money: not earned through effort, but available to enjoy.

Before we meet again, consider this tweet:

You wake up,

drive a BMW,

wear a Rolex,

and think you’ve made it.

Until you realize

that watch only tells you

when your boss lets you rest,

or go home,

or get up,

and then you start wondering why you feel so down.

Because you’re just a slave to time—ruled by someone else’s clock.