Sunk Cost Effects: The Influences of Instruction and Future Return Estimates

Normative principles imply that decision makers′ choices should be affected solely by the prospective future consequences of the options. Previous work, however, has demonstrated the occurrence of sunk cost effects, whereby decision makers are reluctant to abandon options in which they have made prior investments. The present research shows that, contrary to earlier findings, there exist conditions under which sunk cost effects are reduced significantly by instruction in pertinent economic principles. Additional findings indicate that sunk cost effects are mitigated by an important factor that is often present in real-world decision situations but omitted in most sunk cost research paradigms-explicit estimates of the future returns the given options might yield. Theoretical and practical implications are developed and discussed, including possibly common ambiguities about what normative sunk costs principles imply and how they should be applied.     

Let It Go: Positive Affect Attenuates Sunk Cost Bias by Enhancing Cognitive Flexibility

Sunk cost bias is a pervasive problem in consumer decision making. It occurs when people continue to invest resources toward unsuccessful outcomes merely because they previously invested in them. This tendency exists because people devote too much attention to prior investments without considering how other factors may impact their decision outcome. While many suggested interventions to attenuate sunk cost bias involve altering cognitive processes, we examine an alternate affective route. Specifically, we propose that inducing positive affect attenuates sunk cost bias by naturally facilitating flexible thought processes. Across four studies, using hypothetical and real decision tasks, we find that positive affect induced in three different ways consistently attenuates sunk cost bias involving money, time, and effort investments. Further, we demonstrate that this occurs because people experiencing positive affect have enhanced cognitive flexibility. They consider more relevant decision factors and perceive sunk cost as having less of an influence on their decision outcomes. Then, in a fifth study, we show that a thought intervention promoting flexibility can attenuate consumers’ suboptimal commitment tendency in a field setting.     

The Lingering Effects of Our Past Experiences: The Sunk‐Cost Fallacy and the Inaction‐Inertia Effect

The effect of past experiences and actions in shaping current perceptions, emotions, decisions and goals is widely recognized in the psychological literature. When it comes to economic decisions, however, these influences are sometimes seen as impediments to rational decision‐making. In an attempt to explore the enduring consequences of the past, we present, compare, and discuss two familiar behavioral phenomena: The sunk‐cost effect, which refers to situations where continued actions are fueled by past investments, and the inaction‐inertia effect, in which continued inaction is triggered by the shadows of missed opportunities. Although one process elicits continued action and the other continued inaction, we show that there is a great deal of similarity in the psychological underpinnings of these effects, and argue that respecting sunk costs and avoiding actions that are associated with forgone opportunities are not necessarily unreasonable, or maladaptive behaviors.     

De‐escalation after repeated negative feedback: emergent expectations of failure

Research on willingness to make marginal investments (e.g., the escalation and sunk cost literatures) has often focused on project completion decisions, such as the “radar‐blank plane.” This paper discusses a fundamentally different type of marginal investment decision, that of couples deciding whether to continue infertility treatment in the face of repeated failures. Two experiments based on this context show that when people face multiple independent chances to achieve a valued goal but are unsure about chances of success, premature quitting or “de‐escalation” is the norm. Repeated negative feedback appears to induce individuals to see each successive failure as more and more diagnostic. As a result, even a short series of failed attempts evokes beliefs that future attempts will also fail. These emergent expectations of failure, generated by causal attribution processes, associative learning, and/or discounting of ambiguous information, appear very compelling and induce people to forgo profitable marginal investments. Copyright © 2004 John Wiley & Sons, Ltd.     

The mental accounting of sunk time costs: why time is not like money

The sunk‐cost effect, an irrational attention to non‐recoverable past costs while making current decisions, has been documented widely in the domain of monetary costs. In this paper, I study the effect of past time investments on current decisions. In three experiments using choice situations, I demonstrate that the sunk‐cost effect is not observed for past investments of time, but the effect reappears when the investments are expressed as monetary quantities. I further propose that this ‘pseudo‐rationality’ is due to the fact that individuals lack the ability to account for time in the same way as they account for money. In two additional experiments, I facilitate the accounting of time and show that the irrational sunk‐cost effect reappears. In a final experiment, I test my propositions in a setting where subjects make real investments of time and subsequently make real choices. Copyright © 2001 John Wiley & Sons, Ltd.     

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.     

The effect of self‐regulated decision making on career path and major‐related career choice satisfaction

The present research examined the influence of self‐regulated decision making on satisfaction in career path (college major for Study 1, job for Study 2) and major‐related career choice. Results indicate a full mediating effect of fit in the relationship between self‐regulated decision making and satisfaction in career path. Self‐regulated decision making also influenced major–job congruence via satisfaction with a participant's college major. Findings suggest that individuals who possess self‐regulatory ability in decision‐making contexts were more likely to choose majors and jobs of good fit, experience satisfaction from their career decisions, and choose careers relevant to their college majors.     

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. Copyright © 2008 John Wiley & Sons, Ltd.     

The sunk cost effect across species: A review of persistence in a course of action due to prior investment

The sunk cost effect is the bias or tendency to persist in a course of action due to prior investments of effort, money or time. At the time of the only review on the sunk cost effect across species (Arkes & Ayton, 1999), research with nonhuman animals had been ecological in its nature, and the findings about the effect of past investments on current choice were inconclusive. However, in the last decade a new line of experimental laboratory‐based research has emerged with the promise of revolutionizing the way we approach the study of the sunk cost effect in nonhumans. In the present review we challenge Arkes and Ayton's conclusion that the sunk cost effect is exclusive to humans, and describe evidence for the sunk cost effect in nonhuman animals. By doing so, we also challenge the current explanations for the sunk cost effect in humans, as they are not applicable to nonhumans. We argue that a unified theory is called for, because different independent variables, in particular, investment amount, have the same influence on the sunk cost effect across species. Finally, we suggest possible psychological mechanisms shared across different species, contrast and depreciation, that could explain the sunk cost effect.     

沉没成本效应的产生根源与影响因素

沉没成本效应是指决策者的决策行为因受沉没成本影响而产生的一种非理性决策现象。针对这一决策偏差的产生根源,研究者从认知、动机和神经三个角度提出了解释。沉没成本效应的影响因素包括沉没成本特性、情境因素、个体差异和文化差异等。基于先前研究存在的问题和不足,沉没成本效应的未来研究应着眼于改进研究方法,探究产生根源,关注行为沉没成本和加强应用研究。     

Mental budgeting versus marginal decision making: training,experience and justification effects on decisions involving sunk costs

Many studies have shown that individuals make economically irrational decisions by using, rather than ignoring, sunk cost information. In this study, the effects of relevant academic training, financial experience and decision justification on investment decisions involving sunk costs were examined. Data on both the process (strategy) and outcome of the decisions were collected. The results indicate that practicing Certified Public Accountants (CPAs), Masters of Business Administration students (MBAs) and undergraduate accounting students perform better than undergraduate psychology students. The level of training, as measured by the number of college courses in managerial accounting, was found to be positively correlated with performance, while the level of experience, as measured by years of financially‐related work, was not. Justification was found to improve decisions only for those participants with significant work experience (MBAs and CPAs). Strategies used in this type of decision were examined with the surprising finding that economically rational decisions can be made even if sunk costs are not ignored. Copyright © 2007 John Wiley & Sons, Ltd.     

Age differences in financial decision making: The benefits of more experience and less negative emotions

The emerging literature on aging and decision making posits that decision‐making competence changes with age, as a result of age differences in various cognitive and noncognitive individual‐differences characteristics. In a national life‐span sample from the United Kingdom (N = 926), we examined age differences in financial decisions, including performance measures of sunk cost and credit card repayment decisions, and self‐report measures of money management and financial decision outcomes. Participants also completed four individual‐differences characteristics that have been proposed as relevant to financial decision making, including two cognitive ones (numeracy and experience‐based knowledge) and two noncognitive ones (negative emotions about financial decisions). First, we examined how age was related to the four financial decision‐making measures and the four individual‐differences characteristics. Older age was correlated to better scores on each of the four financial decision‐making measures, more experience‐based knowledge, less negative emotions about financial decisions, whereas numeracy and motivation were not significantly correlated with age. Second, we found that considering both the two cognitive and the two noncognitive individual‐differences characteristics increased predictions of financial decision making, as compared with considering either alone. Third, we examined how these four individual‐differences characteristics contributed to age differences in financial decision making. Older adults' higher levels of experience‐based knowledge and lower levels of negative emotions seemed to especially benefit their financial decision making. We discuss implications for theories on aging and decision making, as well as for interventions targeting financial decisions.     

For the Win: Risk‐Sensitive Decision‐Making in Teams

Risk‐sensitivity theory predicts that decision‐makers should prefer high‐risk options in high need situations when low‐risk options will not meet these needs. Recent attempts to adopt risk‐sensitivity as a framework for understanding human decision‐making have been promising. However, this research has focused on individual‐level decision‐making, has not examined behavior in naturalistic settings, and has not examined the influence of multiple levels of need on decision‐making under risk. We examined group‐level risk‐sensitive decision‐making in two American football leagues: the National Football League (NFL) and the National College Athletic Association (NCAA) Division I. Play decisions from the 2012 NFL (Study 1; N = 33 944), 2013 NFL (Study 2; N = 34 087), and 2012 NCAA (Study 3; N = 15 250) regular seasons were analyzed. Results demonstrate that teams made risk‐sensitive decisions based on two distinct needs: attaining first downs (a key proximate goal in football) and acquiring points above parity. Evidence for risk‐sensitive decisions was particularly strong when motivational needs were most salient. These findings are the first empirical demonstration of team risk‐sensitivity in a naturalistic organizational setting. Copyright © 2016 John Wiley & Sons, Ltd.     

Self–other differences in multiattribute decision making: Compensatory versus noncompensatory decision strategies

When making decisions where options involve multiple attributes, a person can choose to use a compensatory, utility maximizing strategy, which involves consideration and integration of all available attributes. Alternatively, a person can choose a noncompensatory strategy that extracts only the most important and reliable attributes. The present research examined whether other‐oriented decisions would involve greater reliance on a noncompensatory, lexicographic decision strategy than self‐oriented decisions. In three studies (Mturk workers and college students), the difference in other‐oriented versus self‐oriented decisions in a medical decision context was explained by a subsample of participants that chose the death minimizing operation on all 10 decisions (Study 1) and a subsample of participants who self‐reported that they used a strategy that minimized the chance of death on every decision (i.e., a lexicographic mortality heuristic; Study 2). In Study 2, tests of mediation found that self‐reported use of the mortality heuristic completely accounted for the self–other effect on decisions. In Study 3, participants were more likely to report prospectively that they would adopt the mortality heuristic when making decisions for others than for themselves, suggesting that participants were not mistakenly inferring a lexicographic decision strategy from their past behavior. The results suggest that self–other effects in multiattribute choice involve differential use of compensatory versus noncompensatory decision strategies and that beyond this group difference, individual differences in the use of these strategies also exist within self‐oriented and other‐oriented decisions.     

Feeling Closer to the Future Self and Doing Better: Temporal Psychological Mechanisms Underlying Academic Performance

This research examined the function of future self‐continuity and its potential downstream consequences for academic performance through relations with other temporal psychological factors and self‐control. We also addressed the influence of cultural factors by testing whether these relations differed by college generation status. Undergraduate students enrolled at a large public university participated in two studies (Study 1: N = 119, M_age = 20.55, 56.4% women; Study 2: N = 403, M_age = 19.83, 58.3% women) in which they completed measures of temporal psychological factors and psychological resources. In Study 2, we also obtained academic records to link responses to academic performance. Future self‐continuity predicted subsequent academic performance and was related positively to future focus, negatively to present focus, and positively to self‐control. Additionally, the relation between future focus and self‐control was stronger for continuing‐generation college students than first‐generation college students. Future self‐continuity plays a pivotal role in academic contexts. Findings suggest that it may have positive downstream consequences on academic achievement by directing attention away from the present and toward the future, which promotes self‐control. Further, the strategy of focusing on the future may be effective in promoting self‐control only for certain cultural groups.     

Weighing the past and the future in decision making

Prior irreversible investments of money, time, or effort referred to as sunk costs frequently lead to decisions to continue a chosen course of action despite that this is irrational. With the aim of demonstrating that such escalation of commitment is a special case of a more general phenomenon, two experiments were carried out employing undergraduates as participants. Experiment 1 showed for fictitious personal and business investment scenarios that both prior losses and gains (sunk outcomes) affected choices to continue or discontinue the investment. In Experiment 2 the effect of sunk outcomes was reduced although not eliminated by a monetary bonus that in one condition depended on the future outcomes of the second gamble in two-stage gambles, in another condition on the future returns in personal investment scenarios. In support of a more inclusive theory subsuming escalation of commitment, the decisions were affected by both past and future outcomes and both gains and losses.     

Escalation of commitment with transparent future outcomes

A frequent case of irrational decision making is the tendency to escalate commitment to a chosen course of action after unsuccessful prior investments of money, effort, or time (sunk costs). In previous research it is argued that escalation does not occur when future outcomes and alternative investments are transparent. Inconsistent with this argument, in an experiment in which undergraduates were presented fictitious investment problems with sunk costs, escalation was demonstrated when full information was given about investment alternatives and estimates of future returns. Thus, it is indicated that people may escalate despite knowing that it will not make them economically better off. A more comprehensive understanding of escalation requires disentangling people's noneconomic reasons for escalation.     

Seeing into the Future: Future Time Orientation as a Moderator of Temporal Distance Effects on Educators' Decisions

Research suggests that the temporal distance from decision outcomes leads to divergent decisions for the near and the distal future. As such, high‐level idealistic concerns and values dominate decisions for the distant future, whereas low‐level pragmatic concerns play a greater role in decisions for the near future. We examined how individual differences in future time orientation are related to decisions vis‐à‐vis the near versus the distal future. The results of three studies, with participants with varying levels of expertise—students (Studies 2 and 3), teachers (Study 1), and school principals (Study 2)—show that principals tend to be overall more idealistic in their choices. Yet discrepancies between decisions for the near versus the distal future exist among all three levels of expertise. However, this dominance of idealistic over pragmatic concerns for more distant future decisions effect was smaller the higher the future time orientation was (whether measured or manipulated). Implications for educational and managerial decision making and training are discussed. Copyright © 2017 John Wiley & Sons, Ltd.     

Self‐Control Moderates Decision‐Making Behavior When Minimizing Losses versus Maximizing Gains

We examined (1) whether people would be more responsive to the delayed consequences of their decisions when attempting to minimize losses than when attempting to maximize gains in a history‐dependent decision‐making task and (2) how trait self‐control would moderate such an effect. In two experiments, participants performed a dynamic decision‐making task where they chose one of two options on each trial. The increasing option always gave a smaller immediate reward but caused future rewards for both options to increase. The decreasing option always gave a larger immediate reward but caused future rewards for both options to decrease. In Experiment 1 where the two options had equivalent expected value in the long run, participants were more prone to select the increasing option, which yielded larger benefits on future trials, in the loss‐minimization condition than in the gain‐maximization condition. Trait self‐control moderated the effect of losses by enhancing the effect for low self‐control participants while attenuating it for high self‐control participants. In Experiment 2 where selecting the increasing option was suboptimal, low self‐control participants still attempted to reduce losses on future trials by selecting the increasing option more often than high self‐control participants. These results suggest that decision makers value delayed consequences of their actions more in a losses domain relative to a gains domain and low self‐control individuals are more susceptible to such an effect. Copyright © 2014 John Wiley & Sons, Ltd.