Sunk Cost as a Self-Management Device

Fuhai HONG, Wei HUANG, Xiaojian ZHAO

Research output: Journal PublicationsJournal Article (refereed)

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
Early online date1 Aug 2018
DOIs
Publication statusPublished - May 2019

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Bibliographical note

W. Huang was supported by a start-up grant from Wuhan University. X. Zhao was supported by the Hong Kong University of Science and Technology Institute for Emerging Market Studies [Grant IEMS17BM01].

Keywords

  • sunk cost
  • limited memory
  • present bias
  • signaling
  • coordination
  • Signaling
  • Sunk cost
  • Coordination
  • Present bias
  • Limited memory

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