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Evaluating the Sunk Cost Effect

Author

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  • Ronayne, David

    (European School of Management and Technology (ESMT))

  • Sgroi, Daniel

    (University of Warwick)

  • Tuckwell, Anthony

    (University of Warwick)

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; 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, 2021. "Evaluating the Sunk Cost Effect," IZA Discussion Papers 14257, Institute of Labor Economics (IZA).
    • Handle: RePEc:iza:izadps:dp14257
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    2. Xuecheng Tian & Bo Jiang & King-Wah Pang & Yuquan Du & Yong Jin & Shuaian Wang, 2024. "A Revisit to Sunk Cost Fallacy for Two-Stage Stochastic Binary Decision Making," Mathematics, MDPI, vol. 12(10), pages 1-13, May.
    3. Karle, Heiko & Kerzenmacher, Florian & Schumacher, Heiner & Verboven, Frank, 2023. "Search Costs and Context Effects," VfS Annual Conference 2023 (Regensburg): Growth and the "sociale Frage" 277612, Verein für Socialpolitik / German Economic Association.
    4. Eleanor Holton & Jan Grohn & Harry Ward & Sanjay G. Manohar & Jill X. O’Reilly & Nils Kolling, 2024. "Goal commitment is supported by vmPFC through selective attention," Nature Human Behaviour, Nature, vol. 8(7), pages 1351-1365, July.
    5. Marcello Negrini & Arno Riedl & Matthias Wibral, 2020. "Still in Search of the Sunk Cost Bias," CESifo Working Paper Series 8623, CESifo.
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    7. Negrini, Marcello & Riedl, Arno & Wibral, Matthias, 2022. "Sunk cost in investment decisions," Journal of Economic Behavior & Organization, Elsevier, vol. 200(C), pages 1105-1135.
    8. Białek Michał & Węgrzyn Michał & Meyers Ethan A., 2021. "Escalation of commitment is independent of numeracy and cognitive reflection. Failed replication and extension of Staw (1976)," Economics and Business Review, Sciendo, vol. 7(2), pages 5-16, June.
    9. Annye Braca & Pierpaolo Dondio, 2023. "Developing persuasive systems for marketing: the interplay of persuasion techniques, customer traits and persuasive message design," Italian Journal of Marketing, Springer, vol. 2023(3), pages 369-412, September.
    10. Karle, Heiko & Kerzenmacher, Florian & Schumacher, Heiner & Verboven, Frank, 2022. "Search Costs and Diminishing Sensitivity," CEPR Discussion Papers 17399, C.E.P.R. Discussion Papers.
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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; randomized controlled trial; online experiment; online survey; psychological scales; scale validation; Raven’s progressive matrices; international cognitive ability resource; cognitive reflection test; openness;
    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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