The purpose of this project is to examine the relevance of sunk costs in decision-making. The prevailing economic paradigm suggests that, in general, rational consumers and producers will ignore sunk costs when making decisions.
Experiments have subjects act as decision-makers who face a cost to enter into a risky investment.
In our initial experiments in this area we look at two factors that may influence the likelihood that participants will display the sunk cost effect. The first is the size of the incremental, or marginal cost of continuing with a project. It is suggested that as the marginal cost of continuing an investment increases the likelihood that participants will display the sunk cost effect will fall. The second factor is the level of complexity associated with the decision to proceed with a sunk cost project, holding the expected pay out and variance constant. As the complexity of the continuation decision increases, participants are less able to assess the true expected value of continuing, and may instead give more weight to the highest possible pay out promised.