Key Takeaways:
Investors who treat stock market gains as a rich uncle's windfall are more likely to gamble with their portfolios, a behavioral finance classic warns.
U.S. stocks have returned more than 17% over the past year, yet the very strength of those gains may be encouraging riskier behavior, according to a Wall Street Journal column published Monday.
"You've made so much money in this long bull market, why not take a flyer here and there?" wrote Jason Zweig, the Intelligent Investor columnist at the Wall Street Journal, citing a 1990 study by Nobel laureate Richard Thaler and psychologist Eric Johnson.
The study found that people are far more likely to gamble after receiving a windfall, a phenomenon Thaler and Johnson called the "house money effect." International stocks returned 23% over the past year, emerging markets 31% and small U.S. stocks nearly 32%, Zweig noted. The S&P 500 has gained roughly 8% in 2026 alone, while the Dow Jones Industrial Average added nearly 550 points Monday, closing up 1%.
The risk, Zweig wrote, is that paper profits can evaporate. "What appears to be ours, in other words, is ours only by leave of the rest of the fraternity of investors," he wrote, quoting the late investment consultant Peter Bernstein. "They own the option, not each of us as individuals."
The Psychology of Windfall Gains
Thaler and Johnson's research showed that the same amount of money feels different depending on how it was earned. Windfalls are mentally coded as "house money," making losses feel less painful because they are perceived as reductions in a gain rather than a loss of one's own capital. This psychological accounting, Zweig argued, is driving some of the market's most speculative bets, including leveraged ETFs, prediction-market wagers and niche crypto funds.
The column's warning arrives as the S&P 500 Information Technology Sector fell 2% Tuesday, dragging the broader index lower even as nine of 11 sectors traded in positive territory. The 10-year Treasury yield stood above 4.60%, while the CME FedWatch tool showed traders pricing in a 31% probability of a rate hike at this week's Federal Reserve meeting.
Wealth That Can Disappear
Zweig cautioned that most increases in equity wealth reflect other investors' willingness to pay higher prices rather than fundamental accumulation. "Seen in those terms, what we like to consider as our wealth has a far more evanescent and transitory character than most of us are ready to admit," Bernstein wrote.
The column cited the Hindu goddess Lakshmi as a metaphor: "a Goddess who always stays on the tip of her toes all the time, ever ready to turn and run away." For investors sitting on double-digit gains, Zweig's message is to enjoy the returns but avoid mistaking paper profits for permanent wealth.
This article is for informational purposes only and does not constitute investment advice.
