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Sunk costs and sunk benefits: A re-examination of re-investment decisions

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  • Duxbury, Darren

Abstract

Prior experimental studies supporting the prospect theory explanation of the sunk-cost effect manipulate the framing of the initial investment, describing it either in neutral terms or as a prior loss. This paper subjects the prospect theory explanation to further examination, but takes an alternative experimental approach based on the differential risk taking behaviour predicted by prospect theory’s S-shaped value function. The experiments manipulate whether an initial investment produces a sunk cost (prior loss) or a sunk benefit (prior gain) and investigate the impact of this on the likelihood of authorising an incremental investment held constant across treatment conditions. To ensure the results are robust to the type of incremental investment, two experiments are conducted across which the outcomes of the incremental investment are manipulated to produce poor or good investment opportunities. In all cases the results fail to support a higher likelihood of authorising the incremental investment following a sunk cost than a sunk benefit. In isolation, therefore, prospect theory is unable to explain fully the sunk-cost effect.

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  • Duxbury, Darren, 2012. "Sunk costs and sunk benefits: A re-examination of re-investment decisions," The British Accounting Review, Elsevier, vol. 44(3), pages 144-156.
    • Handle: RePEc:eee:bracre:v:44:y:2012:i:3:p:144-156
    DOI: 10.1016/j.bar.2012.07.004
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    More about this item

    Keywords

    Escalation of commitment; Prospect theory; Sunk benefit; Sunk cost;
    All these keywords.

    JEL classification:

    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior

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