Loss Aversion as a Potential Factor in the Sunk-Cost Fallacy.

Abstract

.The sunk-cost fallacy (SCF) occurs when an individual makes an investment with a low probability of a payoff because an earlier investment was made. The investments may be time, effort, or money. Previous researchers showed that larger prior investments were more likely to lead to the SCF than lower investments were, though little research has been focused on comparing investment types. There are several theories of the SCF, but few have implicated loss aversion, the higher sensitivity to losses than to gains, as a potential factor. We studied the differential effects of investment amount and type on the occurrence of the SCF and explored loss aversion as a potential explanation of these differences. There were 168 participants, who completed a sunk-cost task as well as an endowment-effect task, which was a measure of loss aversion. A 3 3 mixed-design ANCOVA was used in which the SCF score was the dependent variable and loss-aversion scores were used as a covariate. The SCF occurred most often with money, less with time, and least with effort. Loss aversion displayed a weak negative relation to the SCF.