Sunk cost in investment decisions

56 Pages Posted: 25 Nov 2020 Last revised: 25 Jun 2022

See all articles by Marcello Negrini

Marcello Negrini

Paris School of Economics (PSE), CNRS

Arno Riedl

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

Matthias Wibral

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

Date Written: June 21, 2022

Abstract

We experimentally investigate the effect of sunk cost in a two-stage investment continuation task. After an initial investment, participants have to decide whether or not to continue the project with an additional investment. We do not find a standard sunk cost bias, but observe a robust reverse sunk cost effect: the larger the initial investment, the lower the likelihood to continue investing. This holds despite the fact that we replicate the standard sunk cost bias in hypothetical scenarios. We argue that both, risk aversion together 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 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

Paris School of Economics (PSE), CNRS ( email )

48 Boulevard Jourdan
Paris, 75014 75014
France

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 )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

Matthias Wibral

IZA Institute of Labor Economics

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

Maastricht University, School of Business and Economics ( email )

P.O. Box 616
Maastricht, 6200 MD
Netherlands

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