Level Of Sunk Cost Research Articles

When the cost has sunk: Measuring and comparing the sunk-cost bias in autistic and neurotypical persons

This paper measures and compares the sunk-cost bias among autistic adults, and neurotypical controls. Frequent influencing personality traits and task factors affecting the sunk-cost bias such as age, gender, and education level, time spent in the decision task, and the level of sunk cost (e.g., very low, low, moderate, and high), are controlled for in the analysis. Results show that both autistic and neurotypical individuals are subject to the sunk-cost bias, however, with autistic individuals being less affected by this bias. Results also show significant differences among subgroups of autistic and neurotypical individuals, with autistic individuals with more autism traits being less subject to the sunk-cost bias. For individuals with autism, time spent in the decision task is found to be negatively associated to the sunk-cost bias.

To Tender or Not to Tender? Deliberate and Exogenous Sunk Costs in a Public Good Game

In an experimental study, we compare individual willingness to cooperate in a public good game after an initial team contest phase. While players in the treatment setup make a conscious decision on how much to invest in the contest, this decision is exogenously imposed on players in the control setup. As such, both groups of players incur sunk costs and enter the public good game with different wealth levels. Our results indicate that the way these sunk costs have been accrued matters especially for groups on the losing side of the contest: Given the same level of sunk costs, contributions to the public good are lower for groups which failed to be successful in the preceding between-group contest. Furthermore, this detrimental effect is more pronounced for individuals who play a contest with deliberate contributions before.

The shadow of death model revisited with an application to French firms

This article provides an empirical model of the shadow of death in which the exit probability of a firm depends on the firm’s productive performance and the firm’s level of sunk costs, which are viewed as barriers to exit. The shadow of death effect is treated by assuming a relationship between the propensity to exit and both the contemporaneous and lagged values of efficiency and sunk costs. To estimate the unobserved productive efficiency, we use the Ackerberg et al. (2006) estimator extended by the addition of a correction for selection bias. We use an unbalanced sample of approximately 100 000 French firms over the period 1997 to 2002. Our results indicate that the probability of exit is negatively affected by unobserved individual efficiency and the level of sunk costs. The shadow of death effect applies mainly in manufacturing, where both productive efficiency and sunk costs decrease during several years before exit. In service sectors, the exit process seems to occur more suddenly.

Sunk costs of physical capital and the form of enterprise: investor-owned firms, consumer cooperatives and public enterprises

This article considers how the efficiency of organizational forms of enterprise can depend on the level of sunk costs of physical capital in relation to market size, informational asymmetry and the heterogeneity of firm owners.

A Cross-Cultural Study on Escalation of Commitment Behavior in Software Projects

One of the most challenging decisions that a manager must confront is whether to continue or abandon a troubled project. Published studies suggest that failing software projects are often allowed to continue for too long before appropriate management action is taken to discontinue or redirect the efforts. The level of sunk cost associated with such projects has been offered as one explanation for this escalation of commitment behavior. What prior studies fail to consider is how concepts from risk-taking theory (such as risk propensity and risk perception) affect decision makers' willingness to continue a project under conditions of sunk cost. To better understand factors that may cause decision makers to continue such projects, this study examines the level of sunk cost together with the risk propensity and risk perception of decision makers. These factors are assessed for cross-cultural robustness using matching laboratory experiments carried out in three cultures (Finland, the Netherlands, and Singapore). With a wider set of explanatory factors than prior studies, we could account for a higher amount of variance in decision makers' willingness to continue a project. The level of sunk cost and the risk perception of decision makers contributed significantly to their willingness to continue a project. Moreover, the risk propensity of decision makers was inversely related to risk perception. This inverse relationship was significantly stronger in Singapore (a low uncertainty avoidance culture) than in Finland and the Netherlands (high uncertainty avoidance cultures). These results reveal that some factors behind decision makers' willingness to continue a project are consistent across cultures while others may be culture-sensitive. Implications of these results for further research and practice are discussed.

Business Conditions and Business Starts

This paper analyses the effect of business conditions on new firm starts. The birth of new firms displays a pro-cyclical behaviour, more firms being created when GDP is growing fast and the interest rate is low. The entry response to industry profitability is tempered by the level of sunk costs; for a given profit signal, more entry occurs where sunk costs are low.

The effects of sunk cost and project completion on information technology project escalation

Information technology (IT) projects can fail for a variety of reasons and in some cases can result in considerable financial losses for the organizations that undertake them. One pattern of failure that has been observed but seldom studied is the runaway project that seems to take on a life of its own. Prior research has shown that such projects can exhibit characteristics of the phenomenon known as escalating commitment to a failing course of action. One explanation of escalation is the so-called sunk cost effect which posits that decision-makers are unduly influenced by resources that have already been spent and are therefore more likely to continue pursuing a previously chosen course of action. A competing explanation, labeled the completion effect holds that decision makers escalate their commitment as they draw closer to finishing the project. In order to understand more about the relative effects of sunk cost and project completion information, a role-playing experiment was conducted in which business students were asked to decide whether or not to continue funding an IT project given uncertainty regarding the prospects for success. Three variables were manipulated in the experiment: the level of sunk cost, degree of project completion, and the presence or absence of an alternative course of action. Results showed that subjects willingness to continue a project increased with the level of sunk cost and the degree of project completion, but that subjects were more apt to justify their continuation on the basis of sunk cost. As theory would predict, the presence of an alternative course of action had a moderating effect on the escalation that was observed.