Managers’ Use of Sunk Costs as a Nudge: A Misinfluence Perspective on “Escalation of Commitment”

Abstract

Many current theoretical perspectives suggest that managers will be good at strategically leveraging others’ decision biases to influence them. A common decision bias in organizations is the “sunk-cost fallacy,” where individuals pursue an inferior course of action merely because resources were previously invested in it. In a series of experiments, we tested how good managers are at strategically using the sunk-cost effect as a nudge to influence others’ commitment levels in desired directions. Managers were randomly assigned a goal – to escalate or de-escalate others’ commitments to a project – and then decided whether to highlight or hide sunk costs of the project. In contrast to theoretical predictions, we find that managers often fail to optimally use the sunk-cost effect to nudge others in desired directions. In exploring why this happens, we find that while managers do understand some mechanisms which contribute to the sunk-cost effect (self-justification theory), they fail to understand others (self-presentation theory and prospect theory). Perhaps most startlingly, on average, managers appear to not believe in the sunk-cost effect at all. Our results support an emerging “misinfluence perspective” which suggests that managers will often fail to leverage influence tactics (such as decision biases) when trying to influence others, due to managers’ own psychological limitations.