This was a good post by Jack Raines on the concept of House Money and how that's affecting the way investors make decisions today.
The house money effect is a theory used to explain the tendency of investors to take on greater risk when reinvesting profit earned through investing than they would when investing their savings or wages.
While the thread/post above refers to crypto millionaires who made significant paper wealth over the past few years, the reality is that each asset class has seen a fairly substantial increase over the past ~18 months leading to a number of investors across multiple asset classes 'playing with house money.'
If you don't believe this, take a look around you and see how many people are concerned about macro factors (e.g. rising interest rates).
The idea of playing with 'house money' has also given investors a sense of entitlement where asset values are simply expected to go up. Cutting corners around diligence is encouraged and often necessary to stay competitive. In an era where asset prices continuously go up, it's easy to hide mistakes while still making an acceptable return.
This ultimately comes down to a concept that is best explained in this excerpt from Morgan Housel's essay on Getting Rich vs. Staying Rich.
“I’ve noticed a pattern: Getting rich can be the biggest impediment to staying rich.
It goes like this. The more successful you are at something, the more convinced you become that you’re doing it right. The more convinced you are that you’re doing it right, the less open you are to change. The less open you are to change, the more likely you are to tripping in a world that changes all the time.
There are a million ways to get rich. But there’s only one way to stay rich: Humility, often to the point of paranoia. The irony is that few things squash humility like getting rich in the first place.”
Jack also aptly explains this in the context of poker:
It’s the hand that wins 99% of the time, and you bet like it wins 100% of the time, on an instant that happens to be the 1% of the time. The only way to avoid the most dangerous hand in poker is to stay wary of the pocket 2s. But the only way to get rich quickly is playing like the pocket 2s will never happen.
So what happens now?
We’re in a market where many of the investors that got rich quickly have also seen some of their wealth evaporate over the past couple of months.
The idea of building up the same level of wealth is far more daunting task today, as most of the working population/younger generation (myself included) haven’t seen this type of environment (rising interest rates, economic slowdown, limited asset/wage growth) which will ultimately build a level of despair/hopelessness. As Dr. Moffatt points out below, the consequences can extend beyond pure economics as the new reality sinks in.