The Interpersonal Sunk-Cost Effect

2018 ◽  
Vol 29 (7) ◽  
pp. 1072-1083 ◽  
Author(s):  
Christopher Y. Olivola
Keyword(s):  
Decision Making ◽  
Decision Maker ◽  
Sunk Costs ◽  
Rational Decision ◽  
Sunk Cost ◽  
Rational Decision Making ◽  
Social Closeness ◽  
Sunk Cost Effect ◽  
Human Tendency ◽  
Cost Effect

The sunk-cost fallacy—pursuing an inferior alternative merely because we have previously invested significant, but nonrecoverable, resources in it—represents a striking violation of rational decision making. Whereas theoretical accounts and empirical examinations of the sunk-cost effect have generally been based on the assumption that it is a purely intrapersonal phenomenon (i.e., solely driven by one’s own past investments), the present research demonstrates that it is also an interpersonal effect (i.e., people will alter their choices in response to other people’s past investments). Across eight experiments ( N = 6,076) covering diverse scenarios, I documented sunk-cost effects when the costs are borne by someone other than the decision maker. Moreover, the interpersonal sunk-cost effect is not moderated by social closeness or whether other people observe their sunk costs being “honored.” These findings uncover a previously undocumented bias, reveal that the sunk-cost effect is a much broader phenomenon than previously thought, and pose interesting challenges for existing accounts of this fascinating human tendency.

scholarly journals Sunk cost effect in the decision-making process: an analysis with accounting and business administration students

2019 ◽  
Vol 11 (2) ◽  
Author(s):  
Jéssica Priscila Rodrigues Meireles ◽  
Yuri Gomes Paiva Azevedo ◽  
Lucas Allan Diniz Schwarz ◽  
Hellen Bomfim Gomes
Keyword(s):  
Decision Making ◽  
Business Administration ◽  
Sunk Costs ◽  
Decision Making Process ◽  
Sunk Cost ◽  
Sunk Cost Effect ◽  
Significant Difference ◽  
Business Administration Students ◽  
Cost Effect ◽  
Administration Students

Purpose: The objective of this paper was to analyze the influence of the sunk cost effect in the decision-making process of Accounting and Business Administration undergraduate students of the Federal University of Rio Grande do Norte. Methodology: The sample comprised 655 students, of which 347 were from the Accounting program and 308 from a Business Administration program. Data were collected through the application of structured questionnaires, based on the studies of Arkes and Blumer (1985), Rover, Wuerges, Tomazzia and Borba (2009) and Silva and Domingos (2010). After tabulation, the data were analyzed through descriptive statistics, as well as a Mann-Whitney U test to verify if there are differences between the answers of the Accounting and Business Administration students. Results: The main results suggest that the amount of sunk cost can influence the occurrence of the sunk cost effect, and this evidence is perceived through the mean values, considering that the reduction of the amount of sunk cost is inversely proportional to the average disposition of the respondents in continue investing in the course of action. In addition, to identify that the investigated students take the sunk costs into consideration in the decision-making process, it is verified that there is no statistically significant difference between the medians of the respondents with regard to the questions that allow identifying the susceptibility to the sunk cost effect in the context of business decision-making. Contributions of the Study: The study contributes to signal that the future professionals of Administration and Accounting are susceptible to the sunk cost effect, which can imply in a report of biased accounting information by future accountants, as well as biased decisions by future administrators. Furthermore, these results contrast previous evidence that suggests that agents from different areas of knowledge react differently to the presence of sunk costs.

Role of Sunk Cost in Engineering Idea Generation: An Experimental Investigation

2013 ◽  
Vol 135 (12) ◽  
Author(s):  
Vimal K. Viswanathan ◽  
Julie S. Linsey
Keyword(s):  
Mental Models ◽  
Design Process ◽  
Sunk Costs ◽  
Process Models ◽  
Physical Models ◽  
Controlled Study ◽  
Time Cost ◽  
Sunk Cost ◽  
Sunk Cost Effect ◽  
Cost Effect

Researchers and design practitioners advocate building physical models of ideas at early stages of the design process. Still, the cognitive effects of physical models remain largely unknown. Some studies show that physical models possess the potential to facilitate the generation of high quality ideas. Conversely, other studies demonstrate that physical models can lead to design fixation. A prior controlled study by the authors failed to detect fixation due to early stage physical models. Based upon these conflicting results, this study hypothesizes that the fixation observed in prior studies can be explained by the Sunk Cost Effect. The Sunk Cost Effect pertains to an individual's reluctance to choose a different path of action once he/she invests a significant cost (money, time, or effort). According to this theory, as designers spend more time, money or effort in building physical models, they tend to generate ideas with lower novelty and variety. The prior observational studies use complicated design problems with higher costs compared to the controlled study, possibly explaining the difference in results. This study also hypothesizes that physical models supplement designers' erroneous mental models. The authors investigate these hypotheses through a controlled, between-subject experiment with five conditions: Sketching Only, Metal Building (low time cost), Plastic Building (high time cost), Metal Constrained Sketching, and Plastic Constrained Sketching. In each condition, subjects construct their ideas using materials specified by the name of the condition. The constrained sketching conditions assist in determining if participants tend to limit their ideas to only ones that can be built with given materials even though they are instructed to write down all ideas. The results confirm that the sunk cost of building plays a vital role in the observed fixation; thus, physical models do not inherently cause fixation. Moreover, results also show that physical models supplement designers' erroneous mental models, leading to higher quality ideas. To minimize sunk costs very early in the design process, models should be built with materials requiring minimal time, cost, and effort for the designers.

Studying the Sunk Cost Effect in Engineering Decision Making with Serious Gaming

2015 ◽  
pp. 571-587 ◽  
Author(s):  
Sean D. Vermillion ◽  
Richard J. Malak ◽  
Rachel Smallman ◽  
Sherecce Fields
Keyword(s):  
Decision Making ◽  
Sunk Cost ◽  
Serious Gaming ◽  
Sunk Cost Effect ◽  
Cost Effect

scholarly journals Apparent sunk cost effect in rational agents

2021 ◽  
Author(s):  
Torben Ott ◽  
Paul Masset ◽  
Thiago Santos Gouvea ◽  
Adam Kepecs
Keyword(s):  
Generative Models ◽  
Behavioral Pattern ◽  
Sunk Costs ◽  
Rational Decision ◽  
Decision Strategy ◽  
Sunk Cost ◽  
Attrition Bias ◽  
Cognitive Behaviors ◽  
Economic Decisions ◽  
Cost Effect

Rational decision makers aim to maximize their gains, but humans and other animals often fail to do so, exhibiting biases and distortions in their choice behavior. In a recent study of economic decisions, humans, mice, and rats have been reported to succumb to the sunk cost fallacy, making decisions based on irrecoverable past investments in detriment of expected future returns. We challenge this interpretation because it is subject to a statistical fallacy, a form of attrition bias, and the observed behavior can be explained without invoking a sunk cost-dependent mechanism. Using a computational model, we illustrate how a rational decision maker with a reward-maximizing decision strategy reproduces the reported behavioral pattern and propose an improved task design to dissociate sunk costs from fluctuations in decision valuation. Similar statistical confounds may be common in analyses of cognitive behaviors, highlighting the need to use causal statistical inference and generative models for interpretation.

scholarly journals Return The Sunk Costs Are Sunk Concept To Principles Of Economics Textbooks

2011 ◽  
Vol 3 (6) ◽  
Author(s):  
William Young Davis
Keyword(s):  
Decision Making ◽  
Sunk Costs ◽  
Psychological Explanation ◽  
Rational Decision ◽  
Rational Decision Making ◽  
The Common

The purpose of this paper is to establish a compelling case for the inclusion of the profoundly important “sunk costs are sunk” concept in all principles of economics textbooks.  First, the paper will provide examples of the concept's relevance in political/military decisions.  Second, it will supply business examples of where failure to recognize this concept has led to nearly disastrous results.  Third, it will provide numerous examples of faulty decisions by individuals resulting from the non-application of the concept.   Finally, the paper will provide a psychological explanation for the common failure to properly incorporate the concept into logical and rational decision-making.

scholarly journals On the Irrationality of Being in Two Minds

Entropy ◽  
2020 ◽  
Vol 22 (2) ◽  
pp. 174 ◽  
Author(s):  
Shahram Dehdashti ◽  
Lauren Fell ◽  
Peter Bruza
Keyword(s):  
Decision Making ◽  
Probability Theory ◽  
Quantum Mechanics ◽  
Decision Maker ◽  
General Framework ◽  
Decision Making Under Uncertainty ◽  
Rational Decision ◽  
Rational Decision Making ◽  
Accessible Information ◽  
Human Decision

This article presents a general framework that allows irrational decision making to be theoretically investigated and simulated. Rationality in human decision making under uncertainty is normatively prescribed by the axioms of probability theory in order to maximize utility. However, substantial literature from psychology and cognitive science shows that human decisions regularly deviate from these axioms. Bistable probabilities are proposed as a principled and straight forward means for modeling (ir)rational decision making, which occurs when a decision maker is in “two minds”. We show that bistable probabilities can be formalized by positive-operator-valued projections in quantum mechanics. We found that (1) irrational decision making necessarily involves a wider spectrum of causal relationships than rational decision making, (2) the accessible information turns out to be greater in irrational decision making when compared to rational decision making, and (3) irrational decision making is quantum-like because it violates the Bell–Wigner polytope.

A Meta-Analysis Comparing the Sunk Cost Effect for IT and Non-IT Projects

2011 ◽  
pp. 169-186
Author(s):  
Jijie Wang
Keyword(s):  
Effect Size ◽  
Meta Analysis ◽  
Sunk Costs ◽  
Future Research ◽  
Management Problem ◽  
It Projects ◽  
Sunk Cost ◽  
Sunk Cost Effect ◽  
Key Factor ◽  
Cost Effect

Escalation is a serious management problem, and sunk costs are believed to be a key factor in promoting escalation behavior. While many laboratory experiments have been conducted to examine the effect of sunk costs on escalation, there has been no effort to examine these studies as a group in order to determine the effect size associated with the so-called “sunk cost effect.” Using meta-analysis, we analyzed the results of 20 sunk cost experiments and found: (1) a large effect size associated with sunk costs, and (2) stronger effects in experiments involving information technology (IT) projects as opposed to non-IT projects. Implications of the results and future research directions are discussed.

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