Still in Search of the Sunk Cost Bias

54 Pages Posted: 20 Oct 2020

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: 2020

Abstract

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: C910, D010, D900, D910

Suggested Citation

Negrini, Marcello and Riedl, Arno M. and Wibral, Matthias, Still in Search of the Sunk Cost Bias (2020). CESifo Working Paper No. 8623, Available at SSRN: https://ssrn.com/abstract=3715275

Marcello Negrini (Contact Author)

Maastricht University - School of Business and Economics ( email )

Netherlands

Arno M. Riedl

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

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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