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Evaluating the Sunk Cost Effect

Author

Listed:
  • Ronayne, David

    (University of Oxford and Nuffield College)

  • Sgroi, Daniel

    (University of Warwick, ESRC CAGE Centre and IZA Bonn)

  • Tuckwell, Anthony

    (University of Warwick, ESRC CAGE Centre and the Alan Turing Institute)

Abstract

We provide experimental evidence of behavior consistent with the sunk cost effect. Subjects who earned a lottery via a real-effort task were given an opportunity to switch to a dominant lottery; yet 23% chose to stick with their dominated lottery. The endowment effect accounts for roughly only one third of the effect. Subjects’ capacity for cognitive reflection is a significant determinant of sunk cost behavior. We also find stocks of knowledge or experience (crystallized intelligence) predict sunk cost behavior, rather than algorithmic thinking (fluid intelligence) or the personality trait of openness. We construct and validate a scale, the “SCE-8”, which encompasses many resources individuals can spend, and offers researchers an efficient way to measure susceptibility to the sunk cost effect.

Suggested Citation

  • Ronayne, David & Sgroi, Daniel & Tuckwell, Anthony, 2020. "Evaluating the Sunk Cost Effect," CAGE Online Working Paper Series 475, Competitive Advantage in the Global Economy (CAGE).
  • Handle: RePEc:cge:wacage:475
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    More about this item

    Keywords

    sunk cost effect; sunk cost fallacy; endowment effect; cognitive ability; fluid intelligence; crystallized intelligence; reflective thinking; online experiment; online survey; psychological scales; scale validation; Raven’s progressive matrices; international cognitive ability resource; cognitive reflection test; openness. JEL Classification: D91; C83; C90;
    All these keywords.

    JEL classification:

    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • C83 - Mathematical and Quantitative Methods - - Data Collection and Data Estimation Methodology; Computer Programs - - - Survey Methods; Sampling Methods
    • C90 - Mathematical and Quantitative Methods - - Design of Experiments - - - General

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