How Do Sunk Costs Affect Decisions?

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How do sunk costs affect decisions? Word count: 2135 The sunk cost effect refers to “people’s greater tendency to continue an endeavour once an investment in money, effort or time has been made” (Arkes & Blumer, 1985). Hence costs that have been paid (or “sunk”) influence people’s decisions to continue investing opposing the basic principle in economics; that the past should affect current decisions (Frank 1994). The present essay will expose some relevant examples of the extensive research made on the subject in an attempt to clarify how sunk costs affect people’s decisions. Arkes and Blumer (1985) conducted an experiment in which participants were presented with a scenario in which they first had bought a ticket for a ski trip to Michigan for $100, and weeks later they had bought another ticket for a ski trip to Wisconsin for $50. Participants were told to assume that they would enjoy the Wisconsin ski trip more than the Michigan ski trip. Once the trips were bought, they noticed that both trips took place on the same weekend. As the tickets were non refundable, each participant had to indicate which trip they would choose to go on. Considering that traditional economic theory posits that decisions should be based on costs and benefits that are expected to result from the choice of each option, it would be assumed that everybody should have chosen the most enjoyable alternative, i.e. the Wisconsin trip. However 54% of participants chose the least appealing option, the Michigan trip, suggesting that their decision had been affected by the higher cost incurred, despite the fact that they would enjoy the Wisconsin trip more. In another experiment, Akes and Blumer (1985) presented participants with a scenario in which a man, while he was on his way home, bought a TV dinner that was on sale for $3. Once at home, he called a friend and asked him if he would
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