Hostname: page-component-7b9c58cd5d-6tpvb Total loading time: 0 Render date: 2025-03-17T06:19:46.140Z Has data issue: false hasContentIssue false
  • English
  • Français

Searching for the sunk cost fallacy

Published online by Cambridge University Press:  14 March 2025

Daniel Friedman ,
Kai Pommerenke ,
Rajan Lukose ,
Garrett Milam  and
Bernardo A. Huberman
Daniel Friedman*
Affiliation:
Department of Economics, University of California, Santa Cruz 95064, USA
Kai Pommerenke
Affiliation:
Department of Economics, University of California, Santa Cruz 95064, USA
Rajan Lukose
Affiliation:
Department of Economics, University of California, Santa Cruz 95064, USA
Garrett Milam
Affiliation:
Department of Economics, University of California, Santa Cruz 95064, USA
Bernardo A. Huberman
Affiliation:
Department of Economics, University of California, Santa Cruz 95064, USA
*
e-mail: dan@ucsc.edu
Get access Rights & Permissions [Opens in a new window]

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. Eleven 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 sunk cost effect that is generally insensitive to the proposed psychological drivers.

Keywords

Sunk costsSunk cost fallacySearchSelf-justificationLoss aversion

JEL classification

D11: Consumer Economics: Theory C91: Laboratory, Individual Behavior
Type
Research Article
Information
Experimental Economics , Volume 10 , Issue 1 , March 2007 , pp. 79 - 104
Copyright
Copyright © 2007 Economic Science Association

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

Footnotes

Electronic Supplementary Material Supplementary material is available in the online version of this article at http://dx.doi.org/10.1007/s10683-006-9134-0.

References

Arkes, H.R., & Ayton, P. (1999). The sunk cost and concorde effects: Are humans less rational than lower animals? Psychological Bulletin, 125(5), 591–600.CrossRefGoogle Scholar
Arkes, H.R., & Blumer, C. (1985). The psychology of sunk cost. Organizational Behavior and Human Decision Processes, 35, 124–140.CrossRefGoogle Scholar
Aronson, E. (1968). Dissonance theory: Progress and problems. In Abelson, R. et al (Eds.), Theories of cognitive consistency: A Sourcebook. pp. 5–27. Rand McNally and Co.Google Scholar
Barron, J.M., Chulkov, D.V., & Waddell, G.R. (2001). The escalation phenomenon and executive turnover: Theory and evidence. Mimeo, Purdue University.Google Scholar
Bazerman, M.H. (1986). Judgment in managerial decision making (2nd Ed. Chapter4). John Wiley & Sons, Inc.Google Scholar
Camerer, C.F., & Weber, R.A. (1999). The econometrics and behavioral economics of escalation of commitment: A re-examination of Staw and Hoang's NBA data. Journal of Economic Behavior and Organization, 39(1), 59–82.CrossRefGoogle Scholar
Carmichael, L., & MacLeod, W.B. (2003). Caring about sunk costs: A behavioral solution to the hold-up problem. Journal of Law, Economics and Organization, 19(1), 106–118.CrossRefGoogle Scholar
Cox, J., & Oaxaca, R. (1989). Laboratory experiments with a finite-horizon job-search model. Journal of Risk and Uncertainty, 2, 301–330.CrossRefGoogle Scholar
Cox, J., & Oaxaca, R. (1992). Direct tests of the reservation wage property. The Economic Journal, 102, 1423–1432.CrossRefGoogle Scholar
Cura-Juri, M., & Galiani, S. (2004). In Friedman, D. & Cassar, A. (Eds.), Economics lab: An intensive course in experimental economics, Chapter 18. London and New York, Routledge.Google Scholar
Dixit, A., & Pindyck, R.H. (1994). Investment under uncertainty. Princeton University Press.CrossRefGoogle Scholar
Economist. (2003). The space shuttle: Old, unsafe and costly. Economist magazine., pp. 77.Google Scholar
Elliott, S.R., & Curme, M. (1998). Understanding the sunk cost effect: An experimental approach. Mimeo, Miami University.Google Scholar
Eyster, E. (2002). Rationalizing the past: A taste for consistency. Nuffield College, Oxford, Job-Market Paper.Google Scholar
Festinger, L. (1957). A Theory of cognitive dissonance. Stanford, Stanford University Press.CrossRefGoogle Scholar
Garland, H., & Conlan, D.E. (1998). Too close to quit: The role of project completion in maintaining commitment. Journal of Applied Social Psychology, 28(22), 2025–2048.CrossRefGoogle Scholar
Garland, H., & Newport, S. (1991). Effects of absolute and relative sunk costs on the decision to persist with a course of action. Organizational Behavior and Human Decision Processes, 48, 55–69.CrossRefGoogle Scholar
Harrison, G.W., & Morgan, P. (1990). Search intensity in experiments. Economic Journal, 100, 478–486.CrossRefGoogle Scholar
Heath, C. (1995). Escalation and De-escalation of commitment in response to sunk costs: The role of budgeting in mental accounting. Organizational Behavior and Human Decision Processes, 62(1), 3854.CrossRefGoogle Scholar
Hey, J.D. (1982). Search for rules for search. Journal of Economic Behavior and Organization, 3, 65–81.CrossRefGoogle Scholar
Hey, J.D. (1987). Still searching. Journal of Economic Behavior and Organization, 8, 137–144.CrossRefGoogle Scholar
Kahneman, D., & Tversky, A. (1979). Prospect theory: An analysis of decision under risk. Econometrica, 47(2), 263–291.CrossRefGoogle Scholar
Kanodia, C., Bushman, R., & Dickhaut, J. (1989). Escalation errros and the sunk cost effect: An explanation based on reputation and information asymmetries. Journal of Accounting Research, 27(1), 5977.CrossRefGoogle Scholar
Klein, J., Moon, Y., & Picard, R. W. (1999). This computer responds to user frustration. MIT Media Laboratory. 1999 Vision and Modeling Group Technical Report #502.CrossRefGoogle Scholar
Kogut, C. A. (1990). Consumer search behavior and sunk costs. Journal of Economic Behavior and Organization, 14, 381–392.CrossRefGoogle Scholar
Manley, S., & Seltzer, M. (1997, December 1997). Web facts and fantasy. Proceedings of the 1997 USENIX Symposium on Internet Technologies and Systems, Monterey, CA.Google Scholar
Meyer, D. J. (1993). First price auctions with entry: An experimental investigation. The Quarterly Journal of Economics and Finance, 33(2), 107–122.CrossRefGoogle Scholar
Milgrom, P., & Roberts, J. (1992). Economics, organization, and management. Prentice-Hall, Englewood Cliffs, NJ.Google Scholar
Northcraft, G.B., & Neale, M.A. (1986). Opportunity costs and the framing of resource allocation decisions. Organization Behavior and Human Decision Processes, 37, 348–356.CrossRefGoogle Scholar
Offerman, T., & Potters, J. (2001). Does auctioning of entry licenses induce collusion? An experimental study. Working paper, University of Amsterdam.Google Scholar
Phillips, O.R., Battalio, R.C., & Kogut, C.A. (1991). Sunk and opportunity costs in valuation and bidding. Southern Economic Journal, 58(1), 112–128.CrossRefGoogle Scholar
Schotter, A., & Braunstein, Y.M. (1981). Economic search: An experimental study. Economic Inquiry, 19, 1–25.CrossRefGoogle Scholar
Schwartz, E.I. (1999, June 8). In Schwartz, E.I. (Ed.), Digital Darwinism: 7 Breakthrough Business Strategies for Surviving in the Cutthroat Web Economy. Broadway Books.Google Scholar
Sonnemans, J. (1998). Strategies of search. Journal of Economic Behavior and Organziation, 35(3), 309332.Google Scholar
Sonnemans, J. (2000). Decision and strategies in a sequential search experiment. Journal of Economic Psychology, 21, 91–102.CrossRefGoogle Scholar
Staw, B.M. (1976). Knee deep in the big muddy: A study of escalating commitment to a chosen course of action. Organizational Behavior and Human Performance, 16, 27–44.CrossRefGoogle Scholar
Staw, B.M., & Hoang, H. (1995). Sunk costs in the NBA: Why draft order affects playing time and survival in professional basketball. Administrative Science Quarterly, 40, 474–494.CrossRefGoogle Scholar
Tan, H.-T., & Yates, F.J. (1995). Sunk cost effects: The influences of instruction and future return estimates. Organizational Behavior and Human Decision Processes, 63(3), 311–319.CrossRefGoogle Scholar
Thaler, R. (1980). Toward a positive theory of consumer choice. Journal of Economic Behavior and Organization, 1, 39–60.CrossRefGoogle Scholar
Trivers, R.L. (1972). Parental investment and sexual selection. In Campbell, B. (Ed.), Sexual selection and the descent of man 1871-1971 (pp. 136–179). Chicago: Aldine.Google Scholar
Whyte, G. (1993). Escalating commitment in individual and group decision making: A prospect theory approach. Organizational Behavior and Human Decision Processes, 54(3), 430–455.CrossRefGoogle Scholar
Whyte, G., Sacks, A.M., & Hook, S. (1997). When success breeds failure: The role of self-efficacy in escalating commitment to a losing course of action. Journal of Organizational Behavior, 18(5), 415432.3.0.CO;2-G>CrossRefGoogle Scholar
Supplementary material: File

Friedman et al. supplementary material

Friedman et al. supplementary material 1
Download Friedman et al. supplementary material(File)
File 42.5 KB
Supplementary material: File

Friedman et al. supplementary material

Friedman et al. supplementary material 2
Download Friedman et al. supplementary material(File)
File 30.7 KB
Supplementary material: File

Friedman et al. supplementary material

Friedman et al. supplementary material 3
Download Friedman et al. supplementary material(File)
File 3.6 MB