How does cognitive dissonance influence the sunk cost effect?

Abstract

BackgroundThe sunk cost effect is the scenario when individuals are willing to continue to invest capital in a failing project. The purpose of this study was to explain such irrational behavior by exploring how sunk costs affect individuals’ willingness to continue investing in an unfavorable project and to understand the role of cognitive dissonance on the sunk cost effect.MethodsThis study used an experimental questionnaire survey on managers of firms listed on the Taiwan Stock Exchange and Over-The-Counter.ResultsThe empirical results show that cognitive dissonance does not mediate the relationship between sunk costs and willingness to continue an unfavorable investment project. However, cognitive dissonance has a moderating effect, and only when the level of cognitive dissonance is high does the sunk cost have significantly positive impacts on willingness to continue on with an unfavorable investment.ConclusionThis study offers psychological mechanisms to explain the sunk cost effect based on the theory of cognitive dissonance, and it also provides some recommendations for corporate management.

The influence of performance feedback frequency and affective commitment on the sunk cost effect

“…The experimental materials were mainly adapted from Keil, Mixon, Saarinen, and Tuunainen () and modified according to the research design of this study. A similar approach was also adopted in Chung and Cheng (). All the managers were required to be responsible for an investment project that involves production of an innovation product in their company, and their personal rewards are closely related to the project performance.…”

“…In our experiment, there are four levels of sunk costs represented by completion ratio, including 15%, 40%, 65%, and 90%. This measurement method was also used by Chung and Cheng (). The higher the completion ratio, the more the sunk costs.…”

“…We defined the willingness to continue investing in the project as a manager's willingness to continue a disadvantageous investment project. The willingness was measured on a scale from 0% to 100%, where 0% signifies “definitely unwilling to continue,” and 100% indicates “definitely willing to continue” as used in Chung and Cheng ().…”

“…When a firm manager is unwilling to drop an unfavorable investment project owing to the invested costs (i.e., sunk costs) and continues investing in it, this manager is having an irrational decision‐making behavior called the sunk cost effect (Coleman, ; Keil et al, ; Sharp & Salter, ). Previous studies have mainly discussed the underlying causes of the sunk cost effect, such as cognitive dissonance (Chung & Cheng, ) and the possible moderators on the effect, such as project completion effect (Boehne & Paese, ; Jensen, Conlon, Humphrey, & Moon, ), information asymmetry (Shin, ), and decision types (Roth, Robbert, & Straus, ). However, there is a lack of empirical research exploring the causes for reducing the sunk cost effect.…”

The relationship between irrational gambling beliefs and gambling behavior: application of autoregressive cross-lagged modeling.

“…As opposed to cognitive behavioral theory, cognitive dissonance theory argues that problematic behavior may cause irrational beliefs. Cognitive dissonance is a state of tension that occurs when one behaves in a psychologically inconsistent way [5,6]. When the two aforementioned theories are compared in order to establish a future direction for GD treatment programs, it is important to first test the causality between IGBs and gambling behavior.…”