Sunk Cost as a Self-Management Device

42 Pages Posted: 26 Aug 2016 Last revised: 30 Nov 2017

See all articles by Fuhai Hong

Fuhai Hong

Lingnan University - Department of Economics; Nanyang Technological University (NTU) - Division of Economics

Wei Huang

CUHK Business School, The Chinese University of Hong Kong

Xiaojian Zhao

Monash University - Department of Economics; The Chinese University of Hong Kong, Shenzhen

Date Written: November 28, 2017

Abstract

The sunk cost effect has been widely observed in individual decisions. Building on an intra-personal self-management game, the paper theoretically shows that the sunk cost effect may stem from an attempt to overcome the under-investment problem associated with a high degree of present bias or to resolve the multi-selves coordination problem when the degree of present bias is low. Especially for individuals with severe present bias, the current self may take a costly action (which is a sunk cost for the future self) to signal the individual's high ability that motivates his future self-disciplining behaviors. In equilibrium, a higher level of sunk cost is more likely to give rise to a higher probability for the individual to continue the project. We then conduct a laboratory experiment. The empirical findings are consistent with our theoretical implications.

Keywords: Sunk Cost, Limited Memory, Present Bias, Signaling, Coordination

JEL Classification: C91, D03, D83, Z13

Suggested Citation

Hong, Fuhai and Huang, Wei and Zhao, Xiaojian, Sunk Cost as a Self-Management Device (November 28, 2017). Available at SSRN: https://ssrn.com/abstract=2830409 or http://dx.doi.org/10.2139/ssrn.2830409

Fuhai Hong

Lingnan University - Department of Economics ( email )

8 Castle Peak Road
Lingnan University
Hong Kong, New Territories
China

Nanyang Technological University (NTU) - Division of Economics ( email )

Singapore, 639798
Singapore

Wei Huang

CUHK Business School, The Chinese University of Hong Kong ( email )

Cheng Yu Tung Building
12 Chak Cheung Street
Shatin, N.T.
Hong Kong

Xiaojian Zhao (Contact Author)

Monash University - Department of Economics ( email )

Australia

HOME PAGE: http://https://sites.google.com/site/xjzhao81/

The Chinese University of Hong Kong, Shenzhen ( email )

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