Beating Irrationality: Does Delegating to IT Alleviate the Sunk Cost Effect?

Management Science, Forthcoming

37 Pages Posted: 10 Oct 2011 Last revised: 19 Feb 2014

See all articles by Philipp Herrmann

Philipp Herrmann

University of Paderborn - Faculty of Business Administration, Economics and Business Computing

Dennis Kundisch

Business Information Systems, esp.. Digital Markets

Mohammad Saifur Rahman

Purdue University - Krannert School of Management

Date Written: January 20, 2014

Abstract

We investigate the impact of delegating decision making to information technology (IT) on an important human decision bias – the sunk cost effect. To address our research question, we use a unique dataset containing actual market transaction data for approximately 7,000 pay-per-bid auctions. In contrast with the laboratory experiments of previous related studies, our research presents the unique advantage of investigating the effects of IT-enabled automated bidding agents on the occurrence of a decision bias in real market transactions. We identify normatively irrational decision scenarios and analyze consumer behavior in these situations. Our findings show that participants with a higher behavioral investment are more likely to violate the assumption of normative economic rationality due to the sunk cost effect. More importantly, we observe that the delegation of auction participation, i.e., actual bidding, to IT significantly reduces the occurrence of the sunk cost effect in subsequent decisions made by the same individual. We can attribute this reduction to the comparably lower behavioral investments incurred by auction participants who delegate their bidding to IT. In particular, by mitigating different contributors of behavioral investments, delegating to IT reduces the likelihood of the occurrence of the sunk cost effect by more than 50%.

Keywords: Internet Markets, Delegating to IT, Sunk Cost Effect, Economics of Automated Agents, Decision Support Systems, Decision Bias

JEL Classification: D03, D12, D44, M15

Suggested Citation

Herrmann, Philipp and Kundisch, Dennis and Rahman, Mohammad Saifur, Beating Irrationality: Does Delegating to IT Alleviate the Sunk Cost Effect? (January 20, 2014). Management Science, Forthcoming . Available at SSRN: https://ssrn.com/abstract=1941331 or http://dx.doi.org/10.2139/ssrn.1941331

Philipp Herrmann (Contact Author)

University of Paderborn - Faculty of Business Administration, Economics and Business Computing ( email )

Warburger Str. 100
D-33098 Paderborn
Germany

Dennis Kundisch

Business Information Systems, esp.. Digital Markets ( email )

Warburger Str. 100
D-33098 Paderborn
Germany

Mohammad Saifur Rahman

Purdue University - Krannert School of Management ( email )

403 W. State St
West Lafayette, IN 47907
United States
765-494-4464 (Phone)

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