Determinants of Susceptibility to Sunk-Cost Fallacy: A Nigerian Case Study

Abstract

A general economic principle is that when evaluating the costs of a decision, sunk costs should not be considered, and the decision-maker should consider only those costs that are incurred as a result of making that decision. However, both anecdotal and empirical evidence has shown that when making decisions, people are influenced by sunk costs, thereby committing the sunk-cost fallacy. A corpus of research has established that this fallacy occurs among different nations and cultures to differing extents or degrees. However, none of the previous research was conducted on Nigerians. This study, therefore, investigates whether Nigerians, too, commit this fallacy and then identifies factors that affect Nigerians’ susceptibility to the fallacy. Employing a binary logit model, it was found that about 49 per cent of the respondents to questions based on a decision-making vignette committed the sunk-cost fallacy. The results also showed that locus of cost responsibility (whether the cost was borne by the decision maker or another person on behalf of the decision maker) and ethnicity (whether the decision maker is Yoruba or not) were significant determinants of susceptibility to sunk-cost fallacy. This suggests that in Nigeria, the sunk-cost fallacy is intrapersonal and more prevalent among the Yorubas than among the Hausas or the Igbos. Therefore, the sunk-cost fallacy is ubiquitous and more likely in personal decisions than decisions made on behalf of others.