Abstract
We report the results from an experiment inspired by a seminal study (Staw, 1976) that introduced the notion of “escalation of commitment”, a variant of the sunk cost fallacy. This topic has received much attention outside of economics, and we investigate whether the escalation phenomenon can be reproduced using standard protocols established in experimental economics. The focus is on how decision makers respond to a signal about a previous investment depending on (i) whether or not they were responsible for that investment, (ii) whether the signal is positive or negative, and (iii) whether or not the signal is associated with a loss or gain. We characterize theoretical conditions under which escalation—increased follow-up investments after receiving a negative signal—may occur. Our data indicates that subjects react differently to negative feedback when this feedback is linked to a financial loss and when they have been responsible for the initial investment. We also observe gender effects.
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