Effects of absolute and relative sunk costs on the decision to persist with a course of action

Cognitive bias and how to improve sustainable decision making

The rapid advances of science and technology have provided a large part of the world with all conceivable needs and comfort. However, this welfare comes with serious threats to the planet and many of its inhabitants. An enormous amount of scientific evidence points at global warming, mass destruction of bio-diversity, scarce resources, health risks, and pollution all over the world. These facts are generally acknowledged nowadays, not only by scientists, but also by the majority of politicians and citizens. Nevertheless, this understanding has caused insufficient changes in our decision making and behavior to preserve our natural resources and to prevent upcoming (natural) disasters. In the present study, we try to explain how systematic tendencies or distortions in human judgment and decision-making, known as “cognitive biases,” contribute to this situation. A large body of literature shows how cognitive biases affect the outcome of our deliberations. In natural and primordial situations, they may lead to quick, practical, and satisfying decisions, but these decisions may be poor and risky in a broad range of modern, complex, and long-term challenges, like climate change or pandemic prevention. We first briefly present the social-psychological characteristics that are inherent to (or typical for) most sustainability issues. These are: experiential vagueness, long-term effects, complexity and uncertainty, threat of the status quo, threat of social status, personal vs. community interest, and group pressure. For each of these characteristics, we describe how this relates to cognitive biases, from a neuro-evolutionary point of view, and how these evolved biases may affect sustainable choices or behaviors of people. Finally, based on this knowledge, we describe influence techniques (interventions, nudges, incentives) to mitigate or capitalize on these biases in order to foster more sustainable choices and behaviors.

Exploring the determinants of reinvestment decisions: Sense of personal responsibility, preferences, and loss framing

Two potentially costly errors are common in sequential investment decisions: sticking too long to a failing course of action (escalation of commitment), and abandoning a successful course of action prematurely. Past research has mostly focused on escalation of commitment, and identified three critical determinants: personal responsibility, preferences for prior decisions, and decision framing. We demonstrate in three studies using an incentivized poker inspired task that these determinants of escalation reliably lead decision makers to keep investing even when real money is on the line. We observed in Experiments 1, 2 and 3 that reinvestments were more likely when decision makers were personally responsible for prior decisions. This likelihood was also increased when the decision makers had indicated a preference for initial investments (Experiments 2 and 3), and when outcomes were framed in terms of losses as compared to gains (Experiment 3). Both types of decision errors - escalation of commitment and prematurely abandoning a course of action - could be traced to the same set of determinants. Being personally responsible for prior decisions, having a preference for the initial investment, and loss framing did increase escalation, whereas lacking personal responsibility, having no preference for the initial investment, and gain framing increased the likelihood of prematurely opting out. Finally, personal responsibility had a negative effect on decision quality, as decision-makers were still more likely to reinvest when they were personally responsible for prior decisions, than when prior decisions were assigned optimally by an algorithm (Experiments 2 and 3).

Blind to Bias? Young Children Do Not Anticipate that Sunk Costs Lead to Irrational Choices

Young children anticipate that others act rationally in light of their beliefs and desires, and environmental constraints. However, little is known about whether children anticipate others' irrational choices. We investigated young children's ability to predict that sunk costs can lead to irrational choices. Across four experiments, 5- to 6-year-olds (total N = 185) and adults (total N = 117) judged which of two identical objects an agent would keep, one obtained at a high cost or one obtained at a low cost. In Experiment 1, adults predicted that the agent would choose the high-cost object over the low-cost one, whereas children responded at chance. Experiment 2 replicated these findings in children, but also included another condition which showed they were sensitive to future costs. They predicted that an agent would be more likely to seek out a low-cost item than a high-cost item. Experiments 3 and 4 then found that children do not anticipate the sunk cost bias in first person scenarios, or in interpersonal sunk cost scenarios, where costs are sunk by others. Taken together, our findings suggest that young children may struggle to understand and predict irrational behavior. The findings also reveal an asymmetry between how they consider sunk costs and future costs in understanding actions. We propose that this asymmetry might arise because children do not consider sunk costs as wasted.

The sunk-time effect: effect of time invested and reward magnitude using within-subject design

This study examines the sunk cost phenomenon in the temporal domain with human subjects. We used an adjusting procedure to quantitatively assess the effect of time on the value of an alternative. To explore whether a magnitude effect, similar to that documented in delay discounting studies, could be observed in a sunk cost scenario, we used a within-subject design with two different magnitudes. Two questionnaires were applied individually to 47 first-year psychology students. In each questionnaire, a hypothetical situation was presented in which participants were told that they had waited a certain amount of time to buy a guitar. Then, participants had to pay for the guitar and choose whether to keep it or sell it. Each questionnaire included five delay conditions (between one month and sixty months). The two questionnaires differed only in the nominal value of the guitar. In one of the questionnaires, a smaller magnitude was used (520 USD); in the other one, the value of the guitar was larger (3900 USD). The data suggest a sunk time effect and a linear increase in the subjective value of the alternatives proportional to the time invested. We found evidence of generality of the magnitude effect to the sunk cost scenario. Time investments caused a greater change in the value of outcomes of smaller magnitudes. We suggest that future research lines could evaluate the generality of these findings using different types of population, questionnaires, frames, delays, and commodities.

Partner opportunism and willingness to engage in project relationships

Purpose

The paper seeks to understand the implications of partner opportunism for project relationships.

Design/methodology/approach

Based on the theoretical literature, the paper presents a conceptual model considering the perspective of the organization impacted by partner opportunism.

Findings

The model proposes that partner opportunism lowers willingness to engage by creating perception of loss. The undesirable impact of opportunism on perceived loss is less if the partner has made high relation-specific investments. Also, the negative impact of perceived loss on willingness to engage is less if the partner is difficult to substitute.

Research limitations/implications

The model can be tested in the context of information technology (IT) relationships because of scope for opportunism in IT project relationships. Data can be collected through experimental vignettes.

Originality/value

The model contributes by investigating novel aspects of governance, behavioral consequences of opportunism and relation-specific investments in project relationships. The paper suggests that organizations can protect themselves against the ill effects of partner opportunism by enabling their stakeholders to invest substantial time and effort in the relationship and fortify relational quality and bonding.

Identifying Project Factors That Affect an Investor’s Escalation of Commitment in Public-Private Partnership Projects

The study comprehensively discusses 18 project factors affecting investors’ escalation of commitment (EOC) in a public-private partnership (PPP) project. Using factor analysis, five factor groupings were addressed: the project information and economic benefit, the reward and punishment mechanisms, project uncertainty, the degree of participation and completeness, and the resources invested in the project. The results revealed that the influence of five grouping factors on investor’s EOC is not independent; after performing the weight analysis, the 18 factors had different influences on EOC. These findings offer effective suggestions and theoretical guidelines for reducing the risk of investor EOC.

The influence of culture and framing on investment decision-making

Purpose

Cultural studies in business and economics research are still limited to particular cultures. Knowledge on cultural differences may help international corporations to adapt management practices according to the markets they are operating in. The purpose of this paper is to study the issue of escalation of commitment and framing in a new cultural setting involving Germany and Vietnam. This setting is unique and particularly interesting, for Germany being the biggest European market and Vietnam being one of the fastest growing emerging markets in Asia.

Design/methodology/approach

The authors use a lab experiment with student participants from Germany and Vietnam.

Findings

In a 2×2 in between-experiment, the authors find strong support that Vietnamese participants have a stronger tendency to invest additional resources and evidence that negatively framed information leads to the higher escalation of commitment. Implications are discussed.

Originality/value

The unique empirical comparison is important because differences between other western and eastern countries do not necessarily generalize to the setting.

The Interpersonal Sunk-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.

A Contingency Model of Response to Performance Feedback

This study examines patterns of strategic resource allocation decisions and performance feed-back over time for evidence of both incremental adaptation and escalation of commitment. The investment decisions of 20 teams participating in the management simulation MARKSTRAT are examined. The participants were managers enrolled in an executive education program and M.B.A. students. A contingent model of responses to performance feedback is introduced that includes the moderating factors of prior resource commitments, consecutive periods of positive or negative feedback, and performance distance from aspiration. Evidence is found for both incremental adaptation and escalation of commitment. The implication of this study is that responses to performance feedback should be viewed as contingent on a number of factors, such as distance from aspirations and sunk costs associated with a decision.

Experience that Much Work Produces Many Reinforcers Makes the Sunk Cost Fallacy in Pigeons: A Preliminary Test

The sunk cost fallacy is one of the irrational choice behaviors robustly observed in humans. This fallacy can be defined as a preference for a higher-cost alternative to a lower-cost one after previous investment in a higher-cost alternative. The present study examined this irrational choice by exposing pigeons to several types of trials with differently illuminated colors. We prepared three types of non-choice trials for experiencing different outcomes after presenting same or different colors as alternatives and three types of choice trials for testing whether pigeons demonstrated irrational choice. In non-choice trials, animals experienced either of the following: (1) no reinforcement after the presentation of an unrelated colored stimulus to the alternatives used in the choice situation, (2) no reinforcement after investment in the lower-cost alternative, or (3) reinforcement or no reinforcement after investment in the higher-cost alternative. In choice trials, animals were required to choose in the following three situations: (A) higher-cost vs. lower-cost alternatives, (B) higher-cost vs. lower-cost ones after some investment in the higher-cost alternative, and (C) higher-cost vs. lower-cost alternatives after the presentation of an unrelated colored stimulus. From the definition of the sunk cost fallacy, we assumed that animals would exhibit this fallacy if they preferred the higher-cost alternative in situation (B) compared with (A) or (C). We made several conditions, each of which comprised various combinations of three types of non-choice trials and tested their preference in three choice trials. Pigeons committed the sunk cost fallacy only in the condition that contained non-choice trials (3), i.e., pigeons experienced reinforcement after investing in the higher-cost alternative. This result suggests that sunk cost fallacy might be caused by the experiences of reinforcement after investing in the higher-cost alternative.

The sunk cost effect in pigeons and people: a case of within-trials contrast?

Pigeons show the sunk cost effect in procedures in which their choice between two outcomes is biased by a prior investment. We review recent studies of the sunk cost effect in pigeons, in which choice procedures are analogous to studies with humans using hypothetical scenarios to make explicit a prior investment and the later choice. Zentall's (2010) theory of within-trial contrast can account for the sunk cost effect - an effortful prior investment contrasts with choice outcomes to increase the value of the outcome in which the prior investment was made. The account correctly predicts that in both pigeons and humans, increased prior investment increases the sunk cost effect. We present data from a study with humans using hypothetical scenarios in which delay was varied between the time of the prior investment and later choice. Extending the delay reduced the sunk cost effect, suggesting the need for a second process by which value is depreciated, in addition to the value-enhancing effect of contrast. This article is part of a Special Issue entitled: Tribute to Tom Zentall.

The role of a bad news reporter in information technology project escalation

This paper presents a study of the deaf effect response to bad news reporting in an IT project management context. Using a mixed method approach that included both quantitative and qualitative data obtained through a laboratory experiment, our findings suggest that individuals turn a deaf ear to bad news reporting when bad news is received from a person who is not role prescribed to report bad news or is not perceived to be credible. Further, it was found that perceived message relevance and risk perception mediate these relationships. We also found that men are more willing to take risk, and also less likely to perceive risk compared to women in IT project escalation situations. Consequently, men are more likely to turn a deaf ear, thus causing IT project escalation to occur. In this paper, we discuss several implications of the findings of this study for both research and practice.

Decision-making heuristics and biases across the life span

We outline a contextual and motivational model of judgment and decision-making (JDM) biases across the life span. Our model focuses on abilities and skills that correspond to deliberative, experiential, and affective decision-making processes. We review research that addresses links between JDM biases and these processes as represented by individual differences in specific abilities and skills (e.g., fluid and crystallized intelligence, executive functioning, emotion regulation, personality traits). We focus on two JDM biases-the sunk-cost fallacy (SCF) and the framing effect. We trace the developmental trajectory of each bias from preschool through middle childhood, adolescence, early adulthood, and later adulthood. We conclude that life-span developmental trajectories differ depending on the bias investigated. Existing research suggests relative stability in the framing effect across the life span and decreases in the SCF with age, including in later life. We highlight directions for future research on JDM biases across the life span, emphasizing the need for process-oriented research and research that increases our understanding of JDM biases in people's everyday lives.

When Goal Sharing Produces Support That Is Not Caring

Four studies used experimental and correlational methods to investigate the effect of a “partner-achievement goal,” or a personal goal for a relationship partner’s successful achievement. This goal led support providers to offer unhelpful support about how to play a computer game (Study 1). It also predicted poor achievement for dieting support recipients (Study 2). The effects of partner-achievement goals were moderated by recipient expectations of success and mediated by recipient effort. Recipients with low expectations of their own success requested that their provider partners with partner-achievement goals refrain from offering them support (Study 3); they also invested less time studying Latin grammar and learned fewer Latin words over one week (Study 4). Together, these findings highlight the unique behavioral consequences of partner-achievement goals for both members of a relationship.

The Sunk-Time Effect: An Exploration

We explored the potential for a sunk-cost effect in the realm of time. Questionnaire studies (Experiments 1-4) obtained a sunk-time effect that was robust to manipulations of prospective value, individual versus group consequences, and the effort or enjoyment inherent in the time. Behavioral experiments (Experiments 5-7) also suggested a sunk-time effect and found support for a personal responsibility by sunk cost interaction on choice behavior. We discuss theoretical implications and a potential connection to animal sunk cost phenomena.

Optimism as modifier of escalation of commitment

To study whether optimism-pessimism modifies escalation of commitment, 52 undergraduates were told that they had made an unsuccessful investment, then they chose to continue or discontinue this investment. Optimism about future returns was induced in one group by varying the probability of a successful outcome from an initial low to medium, pessimism was induced in another group by varying this probability from an initial high to medium. Supporting the assumption of the manipulation, the results showed that optimistic participants preferred to continue investments whereas pessimistic participants preferred not to. As predicted, when the sunk cost increased, optimism led to escalation of commitment, whereas pessimism led to de-escalation of commitment. These effects were strengthened when probability of a successful outcome was ambiguous.

The sunk cost effect in pigeons and humans

The sunk cost effect is the increased tendency to persist in an endeavor once an investment of money, effort, or time has been made. To date, humans are the only animal in which this effect has been observed unambiguously. We developed a behavior-analytic model of the sunk cost effect to explore the potential for this behavior in pigeons as well as in humans. Each trial started out with a short expected ratio, but on some trials assumed a longer expected ratio part way through the trial. Subjects had the (usually preferable) option of "escaping" the trial if the longer expected ratio had come into effect in order to bring on a new trial that again had a short expected ratio. In Experiments 1 through 3, we manipulated two independent variables that we hypothesized would affect the pigeons' ability to discriminate the increase in the expected ratio within a trial: (a) the presence or absence of stimuli that signal an increase in the expected ratio, and (b) the severity of the increase in the expected ratio. We found that the pigeons were most likely to persist nonoptimally through the longer expected ratios when stimulus changes were absent and when the increase in the expected ratio was less severe. Experiment 4 employed a similar procedure with human subjects that manipulated only the severity of the increase in the expected ratio and found a result similar to that of the pigeon experiment. In Experiment 5, we tested the hypothesis that a particular history of reinforcement would induce pigeons to persist through the longer expected ratios; the results suggested instead that the history of reinforcement caused the pigeons to persist less compared to pigeons that did not have that history.

When success breeds failure: history, hysteresis, and delayed exit decisions

The effects of feedback equivocality, information availability, and prior decision-making history on escalation and persistence were investigated. Replicating the findings of J.L. Bragger, D.H. Bragger, D.A. Hantula, and J.P. Kirnan (1998), this study found that participants receiving equivocal feedback on their decisions invested more money and invested across more opportunities; those who could purchase information invested fewer resources than did participants who did not have the opportunity to purchase information. There was an inverse linear relationship between the percentage of opportunities in which participants purchased information and the delay to exit decisions and total resources invested. Six weeks earlier, some participants took part in a more profitable investment scenario, and prior experience led to later increased investing when participants were faced with failure, even above that invested in a preceding, succeeding scenario. These results are consistent with an equivocality theory account of escalation.

Impact of decision goal on escalation

This research investigates the sunk-cost effect or escalation defined as the irrational tendency to choose to continue to invest money, time, or effort following unsuccessful investments. Building on previous research demonstrating a loss-sensitivity principle in sequential decision making, the hypothesis was proposed that a loss-minimization goal would lead to stronger effects of sunk outcomes (prior gains and losses) than would a gain-maximizing goal. The hypothesis was investigated in three experiments with undergraduates responding to investment decision scenarios. Although the tendency to continue investments was always larger for gain-maximizing than for loss-minimizing goal instructions, the sunk-outcome effect was stronger in the former case. However, when the decisions were personal and concerned lower stakes rather than business investments involving large amounts of money, the expected stronger effect of sunk outcomes was found for loss-minimizing goal instructions. Another finding was that the expected value was never ignored, thus suggesting that future research should focus on the joint effects of the expected value and sunk outcomes.

Looking forward and looking back: integrating completion and sunk-cost effects within an escalation-of-commitment progress decision

Currently, there are 2 conflicting frameworks with which to understand why decision makers might escalate their commitment to a previously chosen course of action: sunk costs and project completion. The author proposes that sunk costs and need to complete exert simultaneous pressures, both independent and interactive, on a decision maker's level of commitment. The responses of 340 participants were analyzed and supported a complementary relationship between the 2 predictors. In addition, sunk costs demonstrated a curvilinear influence on commitment and an interaction with level of completion that supported a Level of Completion x Sunk Cost moderation model. (A marginal utility model was not supported.) Results are discussed in terms of their relevance toward offering a complementary view of 2 potential antecedents to a decision maker's propensity to escalate his or her commitment to a previously chosen course of action.