Sunk Cost as a Self-Management Device
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AbstractThe 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.
All Author(s) ListFuhai Hong, Wei Huang, Xiaojian Zhao
Journal nameManagement Science
Volume Number65
Issue Number5
Pages2216 - 2230
LanguagesEnglish-United States

Last updated on 2021-21-01 at 02:23