According to Kahneman's "prospect theory," most of us find losses roughly twice as painful as we find gains pleasurable. This radical precept subverts much of "utility theory," the longstanding economic doctrine that says we weigh gain and loss rationally. When combined with the reality that some market winners display the same recklessness as some victorious gamblers — a phenomenon that Richard Thaler, an economist at the University of Chicago, calls "the house-money effect" — the market is often revealed to be downright loony.

The Flemings lot are now talking about "regret aversion," investors' inclination to sell their winners and stick by their losers, and the "house money effect," where people are more likely to bet recklessly in casinos with money they have recently won.

[E]conomic theory rested for a long time on the concept of humans as rational individuals, acting in the light of perfect information. In fact, emotions play havoc with the decision-making process.

One experiment gave 10 students $ 30 each and offered them the chance of doing nothing or flipping a coin to win or lose $ 9. Seven opted to take the gamble. Another set of students was given no money and offered the chance of $ 30 for certain, or a coin flip which gave $ 39 on heads and $ 21 on tails. Only 43 per cent went for the flip, even though the range and prospect of the possible outcomes was the same.

This is described as the "house money" effect: people who have money in their pockets will choose the gamble; those who start with empty pockets will reject it.