On Sunk Costs and Escalation

Abstract

The sunk cost effect is demonstrated when a past investment of time, money, or effort increases the likelihood of further investment. Escalation is the tendency to continue investment despite negative consequences. Although some researchers have defined the sunk cost effect as a subset of escalation, others use the terms interchangeably and only examine one of the two phenomena. In order to further clarify the relation between escalation and the sunk cost effect, the current study used a novel experimental analog wherein participants made an initial forced investment ($5, $20, $35; randomized) before choosing to pay to complete the project ($5, $20, $50, $80, $95; randomized), or to begin a new project (free). There was a systematic positive relation between initial investment price and the proportion of choices to complete the project at the highest terminal investment ($95) for those who committed the sunk cost effect. Moreover, 54 % of participants exhibited an overall sunk cost effect whereas 87 % of participants completed projects even when the additional investment was higher than the expected average of completing a new trial (>$70), demonstrating escalation. These two effects were differentially impacted by the amount of the further investment, functionally differentiating the sunk cost effect from escalation.