Latest / Behavioral Economics with Fexingo: Decision Making, Bias, and How People Really Spend / Why Your Brain Treats Windfall Gains as Found Money
Transcript
- Lucas: So you get a tax refund — say, twelve hundred dollars. It shows up in your bank account, and almost immediately your brain categorises it as 'found money'. You're more likely to blow it on a weekend trip or a new TV than you would be if that same twelve hundred had come out of your paycheck over two months. Luna: And the weird part is, rationally it's the same amount of money. But emotionally it feels different. That's the 'house money effect' — a term borrowed from gambling. Lucas: Exactly. The phrase was coined by Richard Thaler and Eric Johnson back in 1990. They noticed that gamblers who are ahead treat their winnings as 'house money' — money that somehow isn't quite real yet. They take bigger risks with it than they would with their own savings. Luna: There's a clean experiment that proves this. In a 2022 study, researchers gave one group of participants fifty dollars as a windfall — 'here, this is yours.' Another group had to earn the fifty dollars by completing a tedious twenty-minute data-entry task. Lucas: Then both groups were given the chance to gamble that fifty dollars in a simple betting game. The windfall group gambled at a rate that was about 40 percent higher than the earned-money group. Same nominal amount, completely different risk appetite. Luna: Forty percent is huge. That's not a subtle nudge — it's a fundamental shift in how your brain values the money. Lucas: And casinos have built entire business models around this. When you buy chips at a blackjack table, you're exchanging 'real' dollars for tokens. The chips feel less like money — they're already in the 'play' mental account. That's the house money effect in action, even before you've won a hand. Luna: Same with comps. A 'free' room or a buffet voucher — your brain codes that as found money, so you're more willing to gamble it away. Lucas: Right. The casino gives you something that has a clear cash value, but because you didn't pay for it directly, it lands in the 'windfall' mental bucket. And you'll take risks with it that you'd never take with your own after-tax income. Luna: I saw a study from early 2025 that linked this to cryptocurrency trading. People who received crypto as a gift or airdrop — essentially free tokens — were significantly more likely to hold onto them during a crash, because they didn't feel the loss as acutely. Lucas: That's a dangerous version of the effect. With a stock you bought with your own salary, a 30 percent drop hurts. With an airdropped token, your brain says 'well, it was free anyway' — so you ride it down to zero. Luna: And that's exactly what the data showed — the airdrop recipients had an average loss of 67 percent before they finally sold, compared to 41 percent for people who bought the same token with earned money. Lucas: So the house money effect isn't just about casinos. It shows up every time your brain tags money as unexpected or unearned. Tax refunds. Bonuses. Inheritance. Gift cards. Stimulus checks. Luna: Stimulus checks are a perfect example. In 2020 and 2021, a lot of people spent those payments on things like takeout, streaming subscriptions, or new gadgets — stuff they wouldn't have bought with their regular paycheck. Lucas: And that's not necessarily irrational. If the goal of the stimulus was to boost consumption, then the house money effect actually helped the policy work. People spent the money faster because it felt like found money. Luna: But from a personal finance perspective, it can be a trap. If you treat your bonus as 'free money' instead of part of your total compensation, you're more likely to fritter it away on things that don't align with your long-term goals. Lucas: There's a simple mental trick to counter it. Before you spend any unexpected windfall, reframe it. Instead of 'I got a bonus, that's fun money,' think 'my total annual income just went up by X percent.' Or mentally move it into your savings account first, then decide whether to transfer some out. Luna: That's the same logic as the '24-hour rule' for online shopping — delay the decision until the emotional tag fades and the rational brain catches up. Lucas: Exactly. The house money effect operates fast, in the first few seconds after you receive the windfall. If you can pause for even ten seconds and ask yourself 'would I spend this if it came out of my paycheck?' you'll make a better decision. Luna: It reminds me of a finding from a 2023 paper on lottery winners. The winners who mentally folded their winnings into their overall net worth — rather than treating it as 'extra' — had much higher retention rates five years later. Lucas: And that's the real insight here. The house money effect isn't about the money itself — it's about the mental accounting frame you put it in. Change the frame, change the behavior. Luna: If today was actually useful to you, the way these stay ad-free is listener support. You can find us at buy me a coffee dot com slash fexingo. Lucas: Yeah, that really does make a difference — keeps the show going without any sponsor interruptions. Appreciate everyone who's already chipped in. Luna: Alright, so speaking of mental frames — let's talk about one more version of this bias that's quietly distorting your budget. Lucas: The 'Christmas club' effect. Some people still set aside money in a separate account for holiday spending, and because it's labeled 'gift money,' they're comfortable spending it on things they'd never buy with their regular checking account. Luna: It's the same bias working in reverse — you can use it to your advantage. If you label a savings account 'new roof fund' or 'emergency fund,' your brain treats that money as spoken for, not found. Lucas: That's a great reframe. The house money effect can be harnessed for good — you just have to consciously assign the money a job before the emotional tag sets in. Luna: So next time a bonus hits your account, pause. Decide what job that money has before your brain tags it as 'fun zone'. Lucas: Or as the researchers put it: don't let your mental accounting run on autopilot. Label your money intentionally.