Sunk cost as a self-management device

Fuhai Hong, Wei Huang, Xiaojian Zhao

Research output: Contribution to journalArticleResearchpeer-review

2 Citations (Scopus)

Abstract

The sunk cost effect has been widely observed in individual decisions. Building on an intrapersonal self-management game, the paper theoretically shows that the sunk cost effect may stem from an attempt to overcome the underinvestment problem associated with a high degree of present bias or to resolve the multi-selves coordination problem when the degree of present bias is low. Especially for individuals with severe present bias, the current self may take a costly action (which is a sunk cost for the future self) to signal the individual's high success probability that motivates his future self-disciplining behaviors. In equilibrium, a higher level of sunk cost is more likely to give rise to a higher probability for the individual to continue the project. We then conduct a laboratory experiment. The empirical findings are consistent with our theoretical implications.

Original languageEnglish
Pages (from-to)2216-2230
Number of pages15
JournalManagement Science
Volume65
Issue number5
DOIs
Publication statusPublished - May 2019

Keywords

  • Coordination
  • Limited memory
  • Present bias
  • Signaling
  • Sunk cost

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