Escalation and De-escalation of Commitment in Response to Sunk Costs: The Role of Budgeting in Mental Accounting

Purpose – This purpose of this study is to further the study of escalation of commitment by considering the supportive role of accountants in providing reports that favour continuation of unprofitable projects and whether this role is influenced by culture. Research on the escalation of commitment suggests that the decision to commit resources to a failing project is due to several factors that include sunk costs, personal responsibility and culture. Design/methodology/approach – This study employs a between-subjects design to examine accountants’ willingness to provide a report that facilitates continuation of an unprofitable project. The manipulated independent variables are sunk cost (present or absent), the level of reporting responsibility (high or low) and culture (Pacific Islands or Australia). Findings – Our results show that the presence of sunk cost is a motivation for accountants to provide reports that favour continuation of an unprofitable project. The results on cultural difference are also consistent with the contention that culture is influential in decision-making with respect to providing reports that favour continuation of an unprofitable project. We do not, however, find evidence consistent with a personal responsibility affect using the manipulation defined in this study. Research limitations/implications – Consistent with this type of research, the results must be interpreted with respect to the specific design choices used in the experiment. Practical implications – Continued research is needed to examine the impact of sunk costs and specific attributes of culture, such as the willingness to follow superiors, on the escalation of commitment to unprofitable projects. The mitigation of such effects through education of accountants to provide reports that do not favour continuation of unprofitable projects would, for example, be of interest to aid agencies and others investing in projects in developing economies in particular. Originality/value – While previous research generally examines the decision-making role of managers in escalation of commitment to unprofitable projects, this study examines the supportive role that accountants play in facilitating managers’ escalation decisions. This issue is studied within a context examining the potential cultural impact of respect for authority.

Download Full-text

Sacred Savings: The Role of Mental Accounting in Emergency Spending Decisions

PsycEXTRA Dataset ◽

10.1037/e509992015-265 ◽

2014 ◽

Author(s):

Abigail Sussman ◽

Rourke O'Brien

Keyword(s):

Mental Accounting

Download Full-text

Vicarious entrapment: Your sunk costs, my escalation of commitment

PsycEXTRA Dataset ◽

10.1037/e634112013-312 ◽

2011 ◽

Author(s):

Brian C. Gunia ◽

Niro Sivanathan ◽

Adam Galinsky

Keyword(s):

Sunk Costs ◽

Escalation Of Commitment

Download Full-text

Turning Discounts Into Profits: Factors Influencing Online Purchasing Decisions for Hotel Add-on Items

Cornell Hospitality Quarterly ◽

10.1177/1938965520935397 ◽

2020 ◽

pp. 193896552093539 ◽

Cited By ~ 1

Author(s):

Esther L. Kim ◽

Sarah Tanford

Keyword(s):

Process Model ◽

Mental Accounting ◽

Thinking Styles ◽

Impulse Buying ◽

Purchasing Decisions ◽

Price Discount ◽

Mediating Role ◽

Factors Influencing ◽

Impulse Buying Tendency

A hotel website exclusive discount is widely adopted by major chain hotels to increase the volume of direct bookings. Although the traditional purpose of a discount promotion is to attract customers to the business, this research suggests that a hotel website exclusive price discount can induce consumers’ additional spending. Principles of mental accounting and two thinking styles (analytic vs. holistic) predict different effects of a price discount and the add-on product type by individual thinking styles. A quasi-experiment investigated the effect of an unexpected discount, relatedness of add-on item to a hotel stay, and individual thinking styles on add-on purchasing. The mediating role of impulse buying was subsequently examined using the PROCESS model. The effect of a price discount and the relatedness of add-on item are significant for analytic thinkers, whereas holistic thinkers report higher likelihood to purchase add-on items regardless of relatedness. Holistic thinkers’ likelihood to purchase is enhanced through an impulse buying tendency. The findings provide further evidence for the role of individual differences in response to pricing tactics by suggesting that a price promotion increases add-on purchases for analytic thinkers, whereas promoting a sense of impulsiveness can be more effective for holistic thinkers.

Download Full-text

De-escalation of commitment in oil exploration: When sunk costs and negative feedback coincide.

Journal of Applied Psychology ◽

10.1037/0021-9010.75.6.721 ◽

1990 ◽

Vol 75 (6) ◽

pp. 721-727 ◽

Cited By ~ 79

Author(s):

Howard Garland ◽

Craig A. Sandefur ◽

Anne C. Rogers

Keyword(s):

Negative Feedback ◽

Sunk Costs ◽

Escalation Of Commitment ◽

Oil Exploration

Download Full-text

Losing Face and Sinking Costs

Fighting for Status ◽

10.23943/princeton/9780691174501.003.0003 ◽

2017 ◽

Author(s):

Jonathan Renshon

Keyword(s):

Social Dominance ◽

Regression Models ◽

Investment Decision ◽

Social Dominance Orientation ◽

Sunk Costs ◽

Behavioral Measure ◽

Decision Task ◽

Escalation Of Commitment ◽

Course Of Action

This chapter explores the behavioral microfoundations of status dissatisfaction theory by conducting two simultaneously fielded experiments in which status concerns were randomly assigned prior to an “escalation of commitment” task. The first study replicates and extends a sunk costs experiment that asks subjects to make a hypothetical investment decision, while the second introduces the “Island Game” to provide a behavioral measure of escalation of commitment. Several regression models are estimated to determine how leadership affects the tendency to escalate in the primary decision task. The chapter also considers additional mechanisms that link status concerns to war through individuals' willingness to escalate their commitment to a failing course of action, including power and social dominance orientation (SDO). The results show that subjects with stronger preferences for hierarchy—that is, high in SDO—are most affected by status concerns and correspondingly more likely to exhibit patterns of biased escalation.

Download Full-text

Understanding Consumer Behavior through Mental Accounting

Advances in Marketing, Customer Relationship Management, and E-Services - Cases on Consumer-Centric Marketing Management ◽

10.4018/978-1-4666-4357-4.ch001 ◽

2014 ◽

pp. 1-17

Author(s):

Tugba Ucma ◽

Ali Naci Karabulut ◽

Ali Caglar Uzun

Keyword(s):

A Priori ◽

Mental Accounting ◽

Sunk Costs ◽

International Literature ◽

Purchasing Decisions ◽

Consumer Market ◽

Cultural Variables ◽

International Theory ◽

Study Support ◽

Age Range

By setting out from similar studies, this study falls within international literature. The intention is to measure, in connection with Turkey’s consumer market, in order to understand the behaviors of the Turkish consumers that are different in terms of cultural variables. The operability of this international theory is achieved by taking advantage of mental accounting. In seeking the essential objective of the research, a working group formed from two subgroups in order to manifest the decisiveness in the purchasing decisions of individuals, as well as the effects of the mental accounting theories. The first subgroup is formed by 100 university students whose ages are varied between 18 and 30. The second group forms from the same number of students at the same age range. According to the results of analysis carried out in the direction of the collected data from the sub groups, the consequences of this study support the results of the other a priori study in the literature. The greatest consequence of this research is the reactions developed in the expenditures and savings of the consumers subsequent to the formed sunk costs become varied with in terms of the independent “budget” variable.

Download Full-text