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Searching for the Sunk Cost Fallacy

Author

Listed:
  • Daniel Friedman

    (University of California, Santa Cruz)

  • Kai Pommerenke

    (University of California, Santa Cruz)

  • Rajan Lukose

    (HP Labs)

  • Garret Milam

    (University of California, Santa Cruz)

  • Bernardo A. Huberman

    (HP Labs)

Abstract

We seek to isolate in the laboratory factors that encourage and discourage the sunk cost fallacy. Subjects play a computer game in which they decide whether to keep digging for treasure on an island or to sink a cost (which will turn out to be either high or low) to move to another island. The research hypothesis is that subjects will stay longer on islands that were more costly to find. Nine treatment variables are considered, e.g. alternative visual displays, whether the treasure value of an island is shown on arrival or discovered by trial and error, and alternative parameters for sunk costs. The data reveal a surprisingly small and erratic sunk cost effect that is generally insensitive to the proposed psychological drivers.

Suggested Citation

  • Daniel Friedman & Kai Pommerenke & Rajan Lukose & Garret Milam & Bernardo A. Huberman, 2004. "Searching for the Sunk Cost Fallacy," Experimental 0407008, EconWPA.
  • Handle: RePEc:wpa:wuwpex:0407008 Note: Type of Document - pdf; pages: 30
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    References listed on IDEAS

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    2. Hommes, C.H. & Wagener, F.O.O., 2008. "Complex evolutionary systems in behavioral finance," CeNDEF Working Papers 08-05, Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance.
    3. Nava Ashraf & James Berry & Jesse M. Shapiro, 2010. "Can Higher Prices Stimulate Product Use? Evidence from a Field Experiment in Zambia," American Economic Review, American Economic Association, pages 2383-2413.
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    11. Cary Deck & Roman M. Sheremeta, 2012. "Fight or Flight?," Journal of Conflict Resolution, Peace Science Society (International), pages 1069-1088.
    12. Buchheit, Steve & Feltovich, Nick, 2010. "Experimental evidence of a sunk–cost paradox: a study of pricing behavior in Bertrand–Edgeworth duopoly," SIRE Discussion Papers 2010-124, Scottish Institute for Research in Economics (SIRE).
    13. Zeynep B. Irfanoglu & Shakun D. Mago & Roman M. Sheremeta, 2014. "The New Hampshire Effect: Behavior in Sequential and Simultaneous Election Contests," Working Papers 14-15, Chapman University, Economic Science Institute.
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    15. Haita-Falah, Corina, 2017. "Sunk-cost fallacy and cognitive ability in individual decision-making," Journal of Economic Psychology, Elsevier, pages 44-59.
    16. Ho, Teck Hua & Png, Ivan P. L. & Reza, Sadat, 2017. "Sunk Cost Fallacy in Driving the World's Costliest Cars," MPRA Paper 82139, University Library of Munich, Germany.
    17. James C. Cox & Daniel T. Hall, 2010. "Trust with Private and Common Property: Effects of Stronger Property Right Entitlements," Games, MDPI, Open Access Journal, pages 1-24.
    18. Sheremeta, Roman, 2009. "Essays on Experimental Investigation of Lottery Contests," MPRA Paper 49888, University Library of Munich, Germany.
    19. Cary Deck & Roman M. Sheremeta, 2012. "Fight or Flight?," Journal of Conflict Resolution, Peace Science Society (International), pages 1069-1088.
    20. Esposito De Falco Salvatore & Renzi Antonio, 2015. "The Role of Sunk Cost and Slack Resources in Innovation: A Conceptual Reading in an Entrepreneurial Perspective," Entrepreneurship Research Journal, De Gruyter, pages 167-179.
    21. Borland, Jeff & Lee, Leng & Macdonald, Robert D., 2011. "Escalation effects and the player draft in the AFL," Labour Economics, Elsevier, vol. 18(3), pages 371-380, June.
    22. Nava Ashraf & James Berry & Jesse M. Shapiro, 2010. "Can Higher Prices Stimulate Product Use? Evidence from a Field Experiment in Zambia," American Economic Review, American Economic Association, pages 2383-2413.
    23. X. Wang & Bill Yang, 2010. "The sunk-cost effect and optimal two-part pricing," Journal of Economics, Springer, pages 133-148.
    24. Doğan, Gönül & van Assen, Marcel & Potters, Jan, 2013. "The effect of link costs on simple buyer–seller networks," Games and Economic Behavior, Elsevier, vol. 77(1), pages 229-246.

    More about this item

    Keywords

    sunk cost fallacy; experimental economics;

    JEL classification:

    • C9 - Mathematical and Quantitative Methods - - Design of Experiments

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