Sunk cost in investment decisions

Marcello Negrini; Arno Riedl; Matthias Wibral

doi:10.1016/j.jebo.2022.06.028

Sunk cost in investment decisions

Marcello Negrini^*, Arno Riedl, Matthias Wibral

^*Corresponding author for this work

Research output: Contribution to journal › Article › Academic › peer-review

Abstract

We experimentally investigate the effect of sunk cost in a two-stage investment continuation task. After an initial investment, participants have to decide whether or not to continue the project with an additional investment. We do not find a standard sunk cost bias, but observe a robust reverse sunk cost effect: the larger the initial investment, the lower the likelihood to continue investing. This holds despite the fact that we replicate the standard sunk cost bias in hypothetical scenarios. We argue that both, risk aversion without asset integration and loss aversion can account for the reverse sunk cost effect.

Original language	English
Pages (from-to)	1105-1135
Number of pages	31
Journal	Journal of Economic Behavior & Organization
Volume	200
DOIs	https://doi.org/10.1016/j.jebo.2022.06.028
Publication status	Published - Aug 2022

JEL classifications

c91 - Design of Experiments: Laboratory, Individual
d01 - Microeconomic Behavior: Underlying Principles
d90 - Intertemporal Choice and Growth: General
d91 - "Intertemporal Consumer Choice; Life Cycle Models and Saving"

Keywords

sunk cost bias
incentivized experiment
hypothetical scenario
cognitive dissonance
loss aversion
waste aversion

Access to Document

10.1016/j.jebo.2022.06.028Licence: CC BY

1 Discussion paper
1 Working paper

Sunk cost in investment decisions
Negrini, M., Riedl, A. & Wibral, M., 2022, SSRN, 56 p. (SSRN).
Research output: Working paper / Preprint › Discussion paper

Open Access
Still in Search of the Sunk Cost Bias
Negrini, M., Riedl, A. & Wibral, M., 2020, Munich: CESifo, 54 p. (CESifo Working Papers; No. 8623).
Research output: Working paper / Preprint › Working paper

Open Access

Cite this

@article{fc0c5bfcc4f3412aae738a8524607e5b,

title = "Sunk cost in investment decisions",

abstract = "We experimentally investigate the effect of sunk cost in a two-stage investment continuation task. After an initial investment, participants have to decide whether or not to continue the project with an additional investment. We do not find a standard sunk cost bias, but observe a robust reverse sunk cost effect: the larger the initial investment, the lower the likelihood to continue investing. This holds despite the fact that we replicate the standard sunk cost bias in hypothetical scenarios. We argue that both, risk aversion without asset integration and loss aversion can account for the reverse sunk cost effect.",

keywords = "sunk cost bias, incentivized experiment, hypothetical scenario, cognitive dissonance, loss aversion, waste aversion",

author = "Marcello Negrini and Arno Riedl and Matthias Wibral",

note = "data source: primary data",

year = "2022",

month = aug,

doi = "10.1016/j.jebo.2022.06.028",

language = "English",

volume = "200",

pages = "1105--1135",

journal = "Journal of Economic Behavior & Organization",

issn = "0167-2681",

publisher = "Elsevier B.V.",

}

TY - JOUR

T1 - Sunk cost in investment decisions

AU - Negrini, Marcello

AU - Riedl, Arno

AU - Wibral, Matthias

N1 - data source: primary data

PY - 2022/8

Y1 - 2022/8

N2 - We experimentally investigate the effect of sunk cost in a two-stage investment continuation task. After an initial investment, participants have to decide whether or not to continue the project with an additional investment. We do not find a standard sunk cost bias, but observe a robust reverse sunk cost effect: the larger the initial investment, the lower the likelihood to continue investing. This holds despite the fact that we replicate the standard sunk cost bias in hypothetical scenarios. We argue that both, risk aversion without asset integration and loss aversion can account for the reverse sunk cost effect.

AB - We experimentally investigate the effect of sunk cost in a two-stage investment continuation task. After an initial investment, participants have to decide whether or not to continue the project with an additional investment. We do not find a standard sunk cost bias, but observe a robust reverse sunk cost effect: the larger the initial investment, the lower the likelihood to continue investing. This holds despite the fact that we replicate the standard sunk cost bias in hypothetical scenarios. We argue that both, risk aversion without asset integration and loss aversion can account for the reverse sunk cost effect.

KW - sunk cost bias

KW - incentivized experiment

KW - hypothetical scenario

KW - cognitive dissonance

KW - loss aversion

KW - waste aversion

U2 - 10.1016/j.jebo.2022.06.028

DO - 10.1016/j.jebo.2022.06.028

M3 - Article

SN - 0167-2681

VL - 200

SP - 1105

EP - 1135

JO - Journal of Economic Behavior & Organization

JF - Journal of Economic Behavior & Organization

ER -

Sunk cost in investment decisions

Abstract

JEL classifications

Keywords

Access to Document

Fingerprint

Research output

Sunk cost in investment decisions

Still in Search of the Sunk Cost Bias

Cite this