Two Wrongs Make a Right?! Is the Sunk-Cost-Effect a Commitment Device Against Present Bias?

58 Pages Posted: 30 Aug 2017

See all articles by Bjoern Hartig

Bjoern Hartig

Royal Holloway, University of London

Date Written: August 21, 2017

Abstract

We propose that the sunk cost effect is not actually a fallacy, but a beneficial adaption that helps present-biased investors to overcome temptation and stay with worthwhile investments. Although the effect can sometimes overcompensate so that bad investments are held onto, it yields a net benefit in expectations. We find that sophisticated individuals who anticipate their future preferences are more likely to hold onto investments, yet do strictly worse in expectation than naive individuals. Finally, we propose that present bias may also be the key to understanding the overconfidence bias.

Keywords: Cognitive Biases, Hyperbolic Discounting, Inter-temporal Decision-Making, Overconfidence, Present Bias, Sunk Costs, Sunk Cost Fallacy

JEL Classification: D9, D91

Suggested Citation

Hartig, Bjoern, Two Wrongs Make a Right?! Is the Sunk-Cost-Effect a Commitment Device Against Present Bias? (August 21, 2017). Available at SSRN: https://ssrn.com/abstract=3023700 or http://dx.doi.org/10.2139/ssrn.3023700

Bjoern Hartig (Contact Author)

Royal Holloway, University of London ( email )

Royal Holloway College
Egham
Surrey, Surrey TW20 0EX
United Kingdom
+447565576512 (Phone)

HOME PAGE: http://www.royalholloway.ac.uk

Register to save articles to
your library

Register

Paper statistics

Downloads
54
Abstract Views
533
rank
377,878
PlumX Metrics