Do Sunk Costs Matter?

McAfee, R. Preston; Mialon, Hugo M.; Mialon, Sue H.

doi:10.1111/j.1465-7295.2008.00184.x

Cited by 96 publications

(63 citation statements)

References 34 publications

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“…Such "escalation of commitment" has been interpreted as being made to rationalize the decision maker's earlier choice (Staw 1976, Staw and Hoang 1995, Staw et al 1997. However, the same increase in investment could also be interpreted as the rational outcome of the decision maker's moral hazard, building of reputation (Kanodia et al 1989, Camerer andWeber 1999), investment in a real option (Friedman et al 2007, McAfee et al 2010, or a memory shortcut (Baliga and Ely 2011). For instance, Camerer and Weber (1999) reanalyzed the Staw and Hoang (1995) data on escalation of commitment in the deployment of NBA basketball players.…”

Section: Endnotesmentioning

confidence: 99%

Sunk Cost Fallacy in Driving the World’s Costliest Cars

Png

Reza

2018

Management Science

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Abstract.We develop a behavioral model of durable good usage with mental accounting for sunk costs. It predicts higher-than-rational usage that attenuates at a rate that increases with sunk costs. Singapore government policy varied the sunk cost of buying a new car. Using Singapore data, we estimate the elasticity of driving with respect to sunk costs to be 0.048, which implies that government policy between 2009 and 2013 was associated with 86 kilometers per month, or 5.6%, more driving. The results are robust to specifying sunk costs as relative to buyer income and estimation with Hong Kong data. We believe this to be the first field evidence of the sunk cost fallacy in usage of a major durable good.History: Accepted by John List, behavioral economics.

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Section: Endnotesmentioning

confidence: 99%

Sunk Cost Fallacy in Driving the World’s Costliest Cars

Png

Reza

2018

Management Science

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“…This strategic incentive creates a Concorde effect. McAfee, Mialon, and Mialon (2007) also present a model of individual decision-making in which rational behavior gives rise to a Concorde effect. In this model when a high initial investment turns out to be insufficient to complete the project, this conveys information that the incremental costs are low due to a hazard rate assumption about completion probabilities.…”

Section: Introductionmentioning

confidence: 99%

“…2 On the other hand, they find that pricing by a monopolist is not affected by sunk costs, suggesting that the source of the bias was purely strategic. McAfee, Mialon, and Mialon (2007) and Kanodia, Bushman, and Dickhaut (1989) present models in which an agent loses reputation if he reverses course on an initial investment. This strategic incentive creates a Concorde effect.…”

Section: Introductionmentioning

confidence: 99%

Mnemonomics: The Sunk Cost Fallacy as a Memory Kludge

Baliga¹,

Ely²

2011

American Economic Journal: Microeconomics

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We study a sequential investment model and offer a theory of the sunk cost fallacy as an optimal response to limited memory. As new information arrives, a decision-maker may not remember all the reasons he began a project. The initial sunk cost gives additional information about future net profits and should inform subsequent decisions. We show that in different environments, this can generate two forms of sunk cost bias. The Concorde effect makes the investor more eager to complete projects when sunk costs are high and the pro-rata effect makes the investor less eager. The relative magnitude of these effects determines the overall direction of the sunk cost bias. In a controlled experiment we had subjects play a simple version of the model. In a baseline treatment with no memory constraints subjects exhibit the pro-rata bias. When we induce memory constraints the effect reverses and the subjects exhibit the Concorde bias.

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“…Although the sunk cost fallacy is so named because it is thought to result in suboptimal outcomes, some have argued that it may not always be evidence of irrational choices (McAfee et al, 2010). Sometimes, the greater the investment, the more likely the chance of success.…”

Section: The Sunk Cost Fallacymentioning

confidence: 99%

“…Apparently, the loss of the value of a fullprice ticket was more aversive than the loss of the value of a half-price ticket, but of course in either case the cost of the ticket was already lost whether they attended or not. When people demonstrate the sunk cost fallacy (sometimes referred to as an escalation of commitment, McAfee, Mialon, & Mialon, 2010), they often increase their future investment in proportion to the amount already invested (Arkes & Blumer, 1985;Khan, Salter, & Sharp, 2000;Staw, 1976Staw, , 1981.…”

Section: The Sunk Cost Fallacymentioning

confidence: 99%

When Humans and Other Animals Behave Irrationally

Zentall¹

2016

CCBR

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The field of comparative cognition has been largely concerned with the degree to which animals have analogs of the cognitive capacities of humans (e.g., imitation, categorization), but recently attention has been directed to behavior that is judged to be biased or suboptimal. We and some of our colleagues have studied several of these and have found that pigeons too show similar paradoxical behaviors. In the present review I will discuss three of these behaviors: sunk cost, justification of effort, and unskilled gambling. Sunk cost is the tendency to decide to spend more on a losing project because of the amount already invested. Pigeons show similar effects even when there is no ambiguity about the results of continuing versus changing alternatives. Justification of effort is the added value one often gives to a reward based on the effort exerted to obtain it. Pigeons too prefer stimuli that signal outcomes that they have had to work harder to obtain. Humans engage in unskilled gambling, like lotteries and slot machines, in which the return is typically less than the investment. And pigeons show a similar tendency to choose a low-probability, high-payoff alternative (gamble) over a more optimal, high-probability, low-payoff alternative. The fact that animals such as pigeons show behavior thought to be unique to humans suggests that the basis for such behaviors is not likely to result from culture or social mechanisms and may have basic behavioral origins.

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Do Sunk Costs Matter?

Cited by 96 publications

References 34 publications

Sunk Cost Fallacy in Driving the World’s Costliest Cars

Sunk Cost Fallacy in Driving the World’s Costliest Cars

Mnemonomics: The Sunk Cost Fallacy as a Memory Kludge

When Humans and Other Animals Behave Irrationally

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