Can provision of free school uniforms harm attendance? Evidence from Ecuador
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Attendance
Randomized experiment
On the condition that the scale of industry remains unchanged,sunk cost would be one of the factors that hedge the potential firms from entering into the industry.This article uses theory and examples to explain that the low sunk cost firms have lower industry sunk cost and higher social wealth,so low sunk cost firms can drive away the high sunk cost firms.
Hedge
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Economics and business students are taught that sunk costs are irrelevant to their decisions. Yet, there is ample evidence that managers fail to integrate this simple rule and fall prey to what is known as the sunk-costs bias. To mitigate cognitive biases, such as the sunk-cost bias, educators must raise students' awareness of these common judgment errors. In this article, the author proposes a classroom activity that actively engages students and allows them to identify this bias in their own judgments. The activity builds on a series of experiments from the psychology literature. The author discusses how these experiments have been adapted for classroom use and presents evidence suggesting that the activity increased students' awareness of the sunk-cost bias and improved their decision-making skills.
Confirmation bias
Dynamic inconsistency
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Investment
Escalation of commitment
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It is generally acknowledged that sunk cost bias leads to suboptimal decisions, such as escalation of commitment. Some researchers, however, suggest that sunk cost bias can be beneficial when consumers have self-control problems. In this paper we explore the case when consumers with sunk cost bias have time-inconsistent preferences and, therefore, suffer from self-control problems. We experimentally demonstrate that sunk costs can make subjects better off by inducing higher effort. We then develop an analytical model to explore the implications of sunk cost bias for firm’s pricing strategy. We find that, in the presence of sunk cost bias, higher prices can lead to higher experienced quality. We show that sunk cost bias can sometimes improve firm’s profits, lead to lower prices, and increase welfare. Our results suggest that, when consumers use a product for multiple periods, pricing policies such as 0% financing, which are often viewed as exploitative, can instead lead to lower total prices, higher profits, and higher welfare. This paper was accepted by Matthew Shum, marketing. Supplemental Material: The online appendix and data are available at https://doi.org/10.1287/mnsc.2022.4479 .
Dynamic inconsistency
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The sunk cost effect is manifested in a tendency to continue an endeavor once an investment has been made. Arkes and Blumer (1985) showed that a sunk cost increases one's estimated probability that the endeavor will succeed [p(s)]. Is this p(s) increase a cause of the sunk cost effect, a consequence of the effect, or both? In Experiment 1 participants read a scenario in which a sunk cost was or was not present. Half of each group read what the precise p(s) of the project would be, thereby discouraging p(s) inflation. Nevertheless these participants manifested the sunk cost effect, suggesting p(s) inflation is not necessary for the effect to occur. In Experiment 2 participants gave p(s) estimates before or after the investment decision. The latter group manifested higher p(s), suggesting that the inflated estimate is a consequence of the decision to invest. Copyright © 2000 John Wiley & Sons, Ltd.
Investment
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This paper is to investigate the dynamic adjustment process in terms of endogenous sunk costs,complement with existing explanations of exogenous sunk cost.Based on the endogenous sunk cost,we found the generation and outcomes of sunk costs resulting from the factor and product market imperfection under fundamental uncertainty.Hence we provide some solution to path dependence,that is,resulting from endogenous sunk cost together with fundamental uncertainty,not risk,and make use of the sunk cost approach to take into account dynamic adjustment process,and we found that endogenous sunk costs lead to general equilibrium failure.Thus we provide policy for the fundamental uncertainty and sunk cost management.
Complement
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Investment
Social cost
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The sunk cost is defined as a greater disposition to continue an endeavor, once an investment in money, effort or time has been made. According to economic theory, however, these past expenses should not be taken into consideration, as they cannot be recovered. The objective of this study is to investigate if the student from undergraduate courses in the area of business is less susceptible to the sunk costs effect than students from other areas. Five hundred and twenty eight questionnaires were applied on students of nine undergraduate courses of three universities of Santa Catarina. The results confirm the relevance of the cognitive bias caused by sunk costs, as they indicate a lower probability of choosing the right answer when these involve sunk costs in the decisions. The assumption that the students from the business area are less affected by this bias was not confirmed.
Investment
Relevance
Opportunity cost
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The purpose of this project is to examine the relevance of sunk costs in decision-making. A “sunk” cost is an unrecoverable monetary or time commitment made to an endeavor. The prevailing economic paradigm suggests that, in general, rational consumers and producers will ignore sunk costs when making decisions. Thaler (1980) and Arkes and Blumer (1985) are two early and influential attempts to show that decision-makers may not always ignore sunk costs (and, in failing to do so, demonstrate a “sunk cost effect”). Two general approaches have emerged for empirically examining the relevance of sunk costs in decision-making: surveys and experiments. Explicitly or implicitly, surveys and experiments on sunk costs necessarily share (at least) three common elements: (i) the sunk cost, (ii) an initial endowment (or budget), and (iii) the marginal cost and benefit of escalation (i.e. continuing with the sunk cost activity). Within an experimental framework Meyer (1993) finds that the sunk cost effect becomes more pronounced as the size of the sunk cost increases. 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. Understanding The Sunk Cost Effect: An Experimental Approach
Investment
Relevance
Endowment
Investment Decisions
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Theory and evidence have raised concerns that microcredit does more harm than good, particularly when offered at high interest rates. We use a clustered randomized trial, and household surveys of eligible borrowers and their businesses, to estimate impacts from an expansion of group lending at 110% APR by the largest microlender in Mexico. Average effects on a rich set of outcomes measured 18-34 months post-expansion suggest some good and little harm. Other estimators identify heterogeneous treatment effects and effects on outcome distributions, but again yield little support for the hypothesis that microcredit causes harm.
Randomized experiment
Average treatment effect
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