Taken together, these results suggest that the sunk cost effect may reflect non-standard measures of utility , which is ultimately subjective and unique to the individual. Experiments have shown that the sunk cost fallacy and loss aversion are common; hence economic rationality—as assumed by much of economics—is limited. This has enormous implications [ example needed ] for finance , economics, and securities markets in particular. Daniel Kahneman won the Nobel Prize in Economics in part for his extensive work in this area with his collaborator, Amos Tversky.
Many people have strong misgivings about "wasting" resources loss aversion that may contribute to the sunk cost effect.
However, David Gal and Derek Rucker argue that the sunk cost effect cannot be due to loss aversion because there is no comparison of a loss to a gain. Knox and Inkster asked the betters to rate their horse's chances of winning on a 7-point scale. What they found was that people who were about to place a bet rated the chance that their horse would win at an average of 3. Knox and Inkster performed an ancillary test on the patrons of the horses themselves and managed after normalization to repeat their finding almost identically. Other researchers have also found evidence of inflated probability estimations.
Staw and Fox divided the participants into two groups: a low responsibility condition and a high responsibility condition. Similar results have been obtained in other studies. A ticket-buyer who purchases a ticket in advance to an event they eventually turn out not to enjoy makes a semi-public commitment to watching it.
To leave early is to make this lapse of judgment manifest to strangers, an appearance they might otherwise choose to avoid. As well, the person may not want to leave the event, because they have already paid, so they may feel that leaving would waste their expenditure. Alternatively, they may take a sense of pride in having recognized the opportunity cost of the alternative use of time.
Harvard Business Review On Managing Uncertainty
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