Still in search of the sunk cost bias
52 Pages Posted:
Date Written: October 6, 2020
Evidence from hypothetical scenarios strongly suggests the existence of a sunk cost bias, the tendency to `throw good money after bad money.' However, the few studies using incentives are inconclusive. In addition, evidence on potential psychological channels underlying such a bias is scarce. We present a laboratory experiment designed to investigate the sunk cost bias and to test some prominent psychological mechanisms. Inspired by the hypothetical scenarios, we use a two-stage investment task in which an initial investment needs to be made to start a project. In the initial investment stage, the size of the investment and the responsibility of the investor are exogenously varied. In the second investment stage, participants can either decide to terminate the project or to make an additional investment to finish the project. We do not find evidence for the sunk cost bias. 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. Moreover, whether or not subjects are responsible for the initial investment, does not affect their additional investment. More waste averse individuals also do not react more strongly to sunk cost whereas being in the loss domain decreases additional investment. Importantly, we replicate the sunk cost bias when using hypothetical scenarios. Surprisingly, the reverse sunk cost bias also holds for those participants who exhibit a strong sunk cost bias in the hypothetical scenarios.
Keywords: sunk cost bias, incentivized experiment, hypothetical scenario, cognitive dissonance, loss aversion, waste aversion
JEL Classification: C91, D01, D90, D91
Suggested Citation: Suggested Citation