American Economic Journal:
Microeconomics
ISSN 1945-7669 (Print) | ISSN 1945-7685 (Online)
Mnemonomics: The Sunk Cost Fallacy as a Memory Kludge
American Economic Journal: Microeconomics
vol. 3,
no. 4, November 2011
(pp. 35–67)
Abstract
We offer a theory of the sunk cost fallacy as an optimal response to limited memory. As new information arrives, a decision-maker may not remember all the reasons he began a project. The sunk cost gives additional information about future profits and informs subsequent decisions. The Concorde effect makes the investor more eager to complete projects when sunk costs are high and the pro-rata effect makes the investor less eager. In a controlled experiment we had subjects play a simple version of the model. In a baseline treatment subjects exhibit the pro-rata bias. When we induce memory constraints the effect reverses and the subjects exhibit the Concorde bias. (JEL D24, D83, G31)Citation
Baliga, Sandeep, and Jeffrey C. Ely. 2011. "Mnemonomics: The Sunk Cost Fallacy as a Memory Kludge." American Economic Journal: Microeconomics, 3 (4): 35–67. DOI: 10.1257/mic.3.4.35Additional Materials
JEL Classification
- D24 Production; Cost; Capital, Total Factor, and Multifactor Productivity; Capacity
- D83 Search; Learning; Information and Knowledge; Communication; Belief
- G31 Capital Budgeting; Fixed Investment and Inventory Studies; Capacity
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