Sunk cost in an investment task

53 Pages Posted: 25 Nov 2020 Last revised: 9 Sep 2021

See all articles by Marcello Negrini

Marcello Negrini

Maastricht University - School of Business and Economics

Arno Riedl

Maastricht University; IZA Institute of Labor Economics; CESifo (Center for Economic Studies and Ifo Institute); Netspar

Matthias Wibral

Maastricht University, School of Business and Economics; IZA Institute of Labor Economics

Multiple version iconThere are 2 versions of this paper

Date Written: September 9, 2021

Abstract

The sunk cost effect is considered as an important bias and perceived to be a widespread phenomenon in individual decisions. However, the evidence from field data and field and laboratory experiments is inconclusive. We present a laboratory experiment, designed to investigate the sunk cost bias and to test prominent psychological drivers of the bias. Specifically, we implement a managerially relevant two-stage investment continuation task, which was also used in previous hypothetical scenarios. At the initial investment stage, the size of the investment and the responsibility of the investor are exogenously varied. At the second investment stage, participants can either decide to terminate the project or to make an additional investment to finish the project. We replicate the sunk cost bias in the hypothetical scenarios but do not find evidence for the sunk cost bias in the incentivized investment task. To the contrary, we observe a robust reverse sunk cost bias. That is, the larger the initial investment, the lower the likelihood to continue investing in a project. The reverse sunk cost bias also holds for those participants who exhibit a strong sunk cost bias in the hypothetical scenarios. Moreover, whether or not subjects are responsible for the initial investment, does not affect their additional investment. More waste averse individuals do not react more strongly to sunk cost whereas being in the loss domain decreases additional investment. Both, risk aversion in combination with narrow choice bracketing and loss aversion can account for the reverse sunk cost effect.

Keywords: sunk cost bias, incentivized experiment, hypothetical scenario, cognitive dissonance, loss aversion, waste aversion

JEL Classification: C91, D01, D90, D91

Suggested Citation

Negrini, Marcello and Riedl, Arno M. and Wibral, Matthias, Sunk cost in an investment task (September 9, 2021). Available at SSRN: https://ssrn.com/abstract=3706308 or http://dx.doi.org/10.2139/ssrn.3706308

Marcello Negrini

Maastricht University - School of Business and Economics ( email )

Netherlands

Arno M. Riedl (Contact Author)

Maastricht University ( email )

Department of Microeconomics & Public Economics
P.O. Box 616
Maastricht, 6200 MD
Netherlands

HOME PAGE: http://www.arnoriedl.com

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Netspar ( email )

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Tilburg, 5000 LE
Netherlands

Matthias Wibral

Maastricht University, School of Business and Economics ( email )

P.O. Box 616
Maastricht, 6200 MD
Netherlands

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

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