Sunk cost in an investment task
53 Pages Posted: 25 Nov 2020 Last revised: 9 Sep 2021
Date Written: September 9, 2021
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: Suggested Citation