Sunk-cost fallacy and cognitive ability in individual decision-making |
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| Institution: | 1. Department of Economics, College of Business, University of Central Oklahoma, 100 North University Dr., Edmond, OK 73034, United States;2. Department of Economics, Fairfield University, 1073 North Benson Rd., Fairfield, CT 06824, United States;1. Department of Healthcare Epidemiology, Kyoto University Graduate School of Medicine, Kyoto, Japan;2. Department of Nephrology and Dialysis, Kyoritsu Hospital, Hyogo, Japan;3. The Australian and New Zealand Intensive Care Research Centre, the School of Public Health and Preventive Medicine, Monash University, Melbourne, Australia;4. Department of Rheumatology and Clinical Immunology, Kobe University Graduate School of Medicine, Hyogo, Japan;5. Department of Innovative Research and Education for Clinicians and Trainees (DiRECT), Fukushima Medical University, Fukushima, Japan;6. Department of Health Promotion and Human Behavior, Kyoto University Graduate School of Medicine, Kyoto, Japan;7. Department of Psychology, Harvard College, Cambridge, MA, USA;8. Department of Biostatistics, University of Liverpool, Liverpool, UK;1. Laboratory of Psychology. Instituto Tecnológico y de Estudios Superiores de Occidente, Mexico Periférico Sur Manuel Gómez Morin 8585CP, 45090, Jal, Mexico;2. Center for Study and Research in Behavior, Center for Biological and Agricultural Sciences. University of Guadalajara, Mexico |
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| Abstract: | This paper reports on a laboratory experiment aiming at documenting the sunk-cost fallacy in individual decision-making and at identifying the role of the cognitive ability in its manifestation. For this purpose, the design rules out loss aversion and cognitive dissonance, identified by the literature as being the main psychological drivers of the bias. The sunk-cost fallacy is identified by comparing a low and a high sunk-cost treatment, respectively, against a control group that does not incur a sunk cost. There is evidence of a weak manifestation of the sunk-cost fallacy, which is statistically significant only for the high sunk-cost treatment. However, strong evidence of the fallacy was found among the high-cognitive-ability subjects. Finally, although cognitive ability is predictive of status-quo bias, it was not found to reduce the sunk-cost bias. |
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| Keywords: | Cognitive ability Cognitive dissonance Sunk-cost fallacy Loss aversion |
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