Conventional economics supposes that agents value the present vs. the future using an exponential discounting function. In contrast, experiments with animals and humans suggest that agents are better described as hyperbolic discounters, whose discount function decays much more slowly at large times, as a power law. This is generally regarded as being time inconsistent or irrational. We show that when agents cannot be sure of their own future one-period discount rates, then hyperbolic discounting can become rational and exponential discounting irrational. This has important implications for environmental economics, as it implies a much larger weight for the far future.
[Keywords:, environment, time consistent, exponential discounting, geometric random walk, term structure of interest rates.]
2000-khan.pdf: “khan”, AmornrutS
2001-mendelson.pdf: “Amazon.com: Marching Towards Profitability”, Haim Mendelson, Philip Meza
1988-debondt.pdf: “Throwing good money after bad?: Nuclear power plant investment decisions and the relevance of sunk costs”, (1988-09; ):
Experimental psychologists and decision theorists suggest that managers are overly reluctant to terminate economically unviable projects and that they fail to ignore sunk costs. This study serves two purposes. First, it shows that the framework of prospect theory allows us to reconcile the sunk cost effect with some older, well-established ideas in investment decision-making. Secondly, the study investigates the external validity of the sunk cost research in the context of the U.S. nuclear power program. The empirical analysis is based on share price movements in reaction to, among other events, all plant completions and cancellations (over $149$501984 million) prior to March 1984. The results are mixed. However, prudency reviews ordered by Public Service Commissions around the nation point to evidence consistent with the sunk cost fallacy.
2003-carmichael.pdf: “Caring About Sunk Costs: A Behavioral Solution to Holdup Problems With Small Stakes”, (2003-04-01; ):
Economics students need to be taught that opportunity costs are important for optimal decision making but that sunk costs are not. Why should this be? Presumably these students have been making optimal decisions all their lives, and the concepts should be easy for them. We show that caring about sunk costs can help agents achieve efficient investments in a simple team production environment. Furthermore, the solution we propose is uniquely efficient if the environment is sufficiently complex. Hence, in addition to explaining contract form and ownership (Williamson, 1975; Hart, 1995), studies of the holdup problem may also provide insights into observed behavior in day-today bilateral bargaining problems.
2006-chen.pdf: “loss aversion jpe final 06.dvi”, mkc43
Nest-defence behaviour of passerines is a form of parental investment. Parents are selected, therefore, to vary the intensity of their nest defence with respect to the value of their offspring. Great tit, Parus major, males were tested for their defence response to both a nest predator and playback of a great tit chick distress call. The results from the two trials were similar; males gave more alarm calls and made more perch changes if they had larger broods and if they had a greater proportion of sons in their brood. This is the first evidence for a relationship between nest-defence intensity and offspring sex ratio. Paternal quality, size, age and condition, lay date and chick condition did not significantly influence any of the measured nest-defence parameters.
1990-wiklund.pdf: “PII: S0003-3472(05)80919-4”, Guest
1984-northcraft.pdf: “Dollars, Sense, and Sunk Costs: A Life Cycle Model of Resource Allocation Decisions”, (1984-04; ):
Decisions as to whether to cut off a losing enterprise (clouded by what already has been invested in the venture) may be facilitated by a new model proposed here—the life cycle model. The model, borrowing an accounting measure (the time adjusted rate of return) to describe the effect of “sunk costs” on the expected rate of return for future costs in a project, is used to examine the relevance of negative feedback to the decision to commit further resources to completion of a project.
2013-zeng.pdf: “An fMRI study on sunk cost effect”, Jianmin Zeng, Qinglin Zhang, Changming Chen, Rongjun Yu, Qiyong Gong
2001-nolet.pdf: “ecol_82_612.1655_1667.tp”, penta@ultra1
The sunk cost effect is the increased tendency to persist in an endeavor once an investment of money, effort, or time has been made. To date, humans are the only animal in which this effect has been observed unambiguously. We developed a behavior-analytic model of the sunk cost effect to explore the potential for this behavior in pigeons as well as in humans. Each trial started out with a short expected ratio, but on some trials assumed a longer expected ratio part way through the trial. Subjects had the (usually preferable) option of “escaping” the trial if the longer expected ratio had come into effect in order to bring on a new trial that again had a short expected ratio. In Experiments 1 through 3, we manipulated two independent variables that we hypothesized would affect the pigeons’ ability to discriminate the increase in the expected ratio within a trial: (a) the presence or absence of stimuli that signal an increase in the expected ratio, and (b) the severity of the increase in the expected ratio. We found that the pigeons were most likely to persist nonoptimally through the longer expected ratios when stimulus changes were absent and when the increase in the expected ratio was less severe. Experiment 4 employed a similar procedure with human subjects that manipulated only the severity of the increase in the expected ratio and found a result similar to that of the pigeon experiment. In Experiment 5, we tested the hypothesis that a particular history of reinforcement would induce pigeons to persist through the longer expected ratios; the results suggested instead that the history of reinforcement caused the pigeons to persist less compared to pigeons that did not have that history.
2008-strough.pdf: “Are Older Adults Less Subject to the Sunk-Cost Fallacy Than Younger Adults?”, JoNell Strough, Clare M. Mehta, Joseph P. McFall, Kelly L. Schuller
1998-bragger.pdf: “ORGANIZATIONAL BEHAVIOR AND HUMAN DECISION PROCESSES, Vol. 74 Issue 03”, Bragger, J., et al.
1999-stanovich.pdf: “Discrepancies Between Normative and Descriptive Models of Decision Making and the Understanding / Acceptance Principle”, Stanovich, K. E., et al.
2002-boehne.pdf: “Organizational Behavior and Human Decision Processes”, Boehne, D. M. et.al
2010-cohen.pdf: “Free Distribution or Cost-Sharing? Evidence from a Randomized Malaria Prevention Experiment”, (2010-02-01; ):
It is often argued that cost-sharing—charging a subsidized, positive price—for a health product is necessary to avoid wasting resources on those who will not use or do not need the product. We explore this argument through a field experiment in Kenya, in which we randomized the price at which prenatal clinics could sell long-lasting antimalarial insecticide-treated bed nets (ITNs) to pregnant women. We find no evidence that cost-sharing reduces wastage on those who will not use the product: women who received free ITNs are not less likely to use them than those who paid subsidized positive prices. We also find no evidence that cost-sharing induces selection of women who need the net more: those who pay higher prices appear no sicker than the average prenatal client in the area in terms of measured anemia (an important indicator of malaria). Cost-sharing does, however, considerably dampen demand. We find that uptake drops by sixty percentage points when the price of ITNs increases from zero to $0.79$0.602010 (ie., from 100% to 90% subsidy), a price still $0.20$0.152010 below the price at which ITNs are currently sold to pregnant women in Kenya. We combine our estimates in a cost-effectiveness analysis of the impact of ITN prices on child mortality that incorporates both private and social returns to ITN usage. Overall, our results suggest that free distribution of ITNs could save many more lives than cost-sharing programs have achieved so far, and, given the large positive externality associated with widespread usage of ITNs, would likely do so at a lesser cost per life saved.
[Keywords: Subsidies, Prices, Malaria, Distribution costs, Sharing, Women, Anemia, Cost efficiency, Random allocation, Sunk costs]
2007-karavanov.pdf: “Factors Affecting Entrapment: Justification Needs, Face Concerns, and Personal Networks”, (2007; ):
This study explores the link between the entrapment bias and the concept of face (self-positive and other-positive) and internal and external justification processes. It examines how face-saving concerns and justification needs moderate the entrapment bias in accountability condition (ie., presence of constituencies and reporting requirements). In addition, this research looks at whether the size and influence of personal networks is associated with face-saving behaviors that, in turn, affect entrapment. The research also explores whether overall face concerns have an effect on internal and external self-justification.
Participants were 236 undergraduate communication majors enrolled in a large East Coast university, who were assigned to one of the four conditions: (1) constituency, reporting; (2) constituency, no reporting; (3) no constituency; reporting; (4) no constituency; no reporting.
The current investigation did not support the findings from previous studies that suggest that justification processes and face concerns lead to entrapment. This study found that only internal self-justification and other-positive face concerns are related to entrapment, but instead of contributing to entrapment, these aspects prevent individuals from becoming entrapped. Personal networks were demonstrated to have positive effect on both self-positive and other-positive face concerns, providing empirical support for the value of using personal networks as a predictor of face goals. However, personal networks did not contribute to entrapment.
Overall, this study identifies processes and conditions (eg., concern for other-positive face, internal self-justification, reporting requirement, no direct observation by constituency, keeping clear record of performance success or failure) that may prevent the entrapment bias from occurring. Implications of this research are discussed as well as directions for future research.
1988-arkes.pdf: “Eliminating the Hindsight Bias”, (1988-05; ):
Those who consider the likelihood of an event after it has occurred exaggerate their likelihood of having been able to predict that event in advance. We attempted to eliminate this hindsight bias among 194 neuropsychologists. Foresight subjects read a case history and were asked to estimate the probability of three different diagnoses. Subjects in each of the three hindsight groups were told that one of the three diagnoses was correct and were asked to state what probability they would have assigned to each diagnosis if they were making the original diagnosis. Foresight-reasons and hindsight-reasons subjects performed the same task as their foresight and hindsight counterparts, except they had to list one reason why each of the possible diagnoses might be correct. The frequency of subjects succumbing to the hindsight bias was lower in the hindsight-reasons groups than in the hindsight groups not asked to list reasons, x2( 1, N = 140) = 4.12, p < 0.05.
2018-olivola.pdf: “The Interpersonal Sunk-Cost Effect”, (2018-01-01; ):
The sunk-cost fallacy—pursuing an inferior alternative merely because we have previously invested significant, but nonrecoverable, resources in it—represents a striking violation of rational decision making. Whereas theoretical accounts and empirical examinations of the sunk-cost effect have generally been based on the assumption that it is a purely intrapersonal phenomenon (i.e., solely driven by one’s own past investments), the present research demonstrates that it is also an interpersonal effect (i.e., people will alter their choices in response to other people’s past investments). Across eight experiments (n = 6,076) covering diverse scenarios, I documented sunk-cost effects when the costs are borne by someone other than the decision maker. Moreover, the interpersonal sunk-cost effect is not moderated by social closeness or whether other people observe their sunk costs being “honored.” These findings uncover a previously undocumented bias, reveal that the sunk-cost effect is a much broader phenomenon than previously thought, and pose interesting challenges for existing accounts of this fascinating human tendency.
2018-hong.pdf: “Sunk Cost as a Self-Management Device”, (2018-08-01; ):
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.
The online appendix is available at 10.1287 / mnsc.2018.3032
2014-flyvbjerg.pdf: “What You Should Know About Megaprojects and Why: An Overview”, (2014-04-07; ):
This paper takes stock of megaproject management, an emerging and hugely costly field of study. First, it answers the question of how large megaprojects are by measuring them in the units mega, giga, and tera, concluding we are presently entering a new “tera era” of trillion-dollar projects. Second, total global megaproject spending is assessed, at USD 6–9 trillion annually, or 8 percent of total global GDP, which denotes the biggest investment boom in human history. Third, four “sublimes” —political, technological, economic, and aesthetic—are identified to explain the increased size and frequency of megaprojects. Fourth, the “iron law of megaprojects” is laid out and documented: Over budget, over time, over and over again. Moreover, the “break-fix model” of megaproject management is introduced as an explanation of the iron law. Fifth, Albert O. Hirschman’s theory of the Hiding Hand is revisited and critiqued as unfounded and corrupting for megaproject thinking in both the academy and policy. Sixth, it is shown how megaprojects are systematically subject to “survival of the unfittest”, explaining why the worst projects get built instead of the best. Finally, it is argued that the conventional way of managing megaprojects has reached a “tension point”, where tradition is challenged and reform is emerging.