Why does a profit feel like the market's money rather than yours?

Why this matters. Recently gained money is spent more freely than money that has been sitting there, and the feeling that it is somehow not yet yours is the mechanism.

A position closes well. The gain lands in the account. And it does not feel like the rest of the balance — it feels like something extra, something you can be bolder with.

The finding, and a word about its name

Replicated: Thaler and Johnson (1990) showed that a prior gain changes subsequent risk-taking, and that a prior loss changes it differently. The literature calls it the "house money effect", and that name is the reason this lesson pauses.

The metaphor comes from a casino, and this academy does not treat markets as one. The name is kept here because it is the name under which you will find the research; the frame it carries is rejected. There is no house, there is no table, and the money is entirely yours the moment it settles.

What the finding actually says, stripped of the metaphor: money is accounted for by how recently it arrived, and the accounting changes behaviour.

Where it shows up

As a size that grows after a good run without a decision to grow it — which Course 2 examines as it happens, in Why does your position size grow after a good run?. Here we are only naming why the money feels different.

The artefact

Age-blind accounting. Once a week, write the total. Not the total plus this month's gains; one number, with no memory of where any part of it came from.

A balance with no history attached is harder to divide into bold money and careful money, and that is the entire purpose of writing it that way.

Try it now

Write your current total without breaking out anything gained recently. If you found yourself wanting to note the recent part separately, you have just observed the effect directly.