Abstract
The proverb "easy come, easy go" tells us that the regret from losing something depends
upon how hard we worked to get it. Normative economic theory assumes, however, that
liquid wealth is fungible irrespective of its source; how a dollar is obtained should not affect
what we buy with that dollar or the risk we are willing to take investing that dollar. Thaler and
Johnson (1990) dispute that claim with a series of experiments demonstrating that people
make different choices with money that has been easily or unexpectedly obtained. Thaler
argues that people behave as if income and expenses are assigned to separate mental
accounts with limited fungibility between accounts (Thaler 1999; Shefrin and Thaler 1988).
Money easily gained is likely to end up in a mental account from which money is easily spent
and readily wagered. Hard earned money is likely to land in a mental account from which
money is more carefully spend and less readily wagered. For most people, most money is of
the earned variety.
In economics laboratory experiments, participants are typically given an endowment
equivalent to a couple of hours’ wages. Such endowments encourage participants to pay
attention, exert more effort, and try to make choices that lead to higher earnings within the
design of the experiment. However, Thaler and Johnson (1990) argue that when people lose
money they consider to be a windfall gain, the loss is likely to be coded as a reduction in the
gain which “doesn’t hurt as much as losing one’s own cash” (p. 657). Thus laboratory
participants who mentally code money given to them in a laboratory as a windfall gain,
distinct and separate from their earned income and savings, may display much less risk
aversion in the laboratory than they do in their daily lives.
Our purpose is to demonstrate that in an experimental laboratory setting subjects asked to
make risky choices take more risk with money they were given by the experimenter than
money they earned. These differences in risk taking are dramatic and raise questions about
inferences drawn from prior risk taking experiments with endowed money.