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Sunk cost in investment decisions

Author

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  • Negrini, Marcello
  • Riedl, Arno
  • Wibral, Matthias

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 without asset integration and loss aversion can account for the reverse sunk cost effect.

Suggested Citation

  • Negrini, Marcello & Riedl, Arno & Wibral, Matthias, 2022. "Sunk cost in investment decisions," Journal of Economic Behavior & Organization, Elsevier, vol. 200(C), pages 1105-1135.
    • Handle: RePEc:eee:jeborg:v:200:y:2022:i:c:p:1105-1135
    DOI: 10.1016/j.jebo.2022.06.028
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    More about this item

    Keywords

    Sunk cost bias; Incentivized experiment; Hypothetical scenario; Cognitive dissonance; Loss aversion; Waste aversion;
    All these keywords.

    JEL classification:

    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • D01 - Microeconomics - - General - - - Microeconomic Behavior: Underlying Principles
    • D90 - Microeconomics - - Micro-Based Behavioral Economics - - - General
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making

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