Detailed Review: Understanding the Psychology of Sunk Cost Effect

This literature review delves into Arkes and Blumer's seminal article, "The Psychology of Sunk Cost," which explores the irrational economic behavior known as the sunk cost effect. This effect describes the tendency to continue with an endeavor after investing significant resources (time, money, or effort), even when it's no longer the optimal decision. The review outlines Arkes and Blumer's methodology, including ten experiments conducted on college students, and their findings that demonstrate the psychological basis for this behavior, rooted in the desire to avoid appearing wasteful. The review further connects the sunk cost effect to other psychological theories such as cognitive dissonance, low-ball techniques, and entrapment theory. It concludes by highlighting the robustness of the sunk cost theory and its practical implications, emphasizing the importance of considering sunk costs in a proper perspective to improve decision-making.

Running head: Sunk Cost 1
THE PSYCHOLOGY OF SUNK COST.
Student name:
Institution affiliation:

The psychology of sunk cost 2
Arkes, H. R., & Blumer, C. (1985). The psychology of sunk cost. Organizational behaviour
and human decision processes, 35(1), 124-140.
The article “The psychology of sunk cost” by Arkes and Blumer seeks to explain the
irrational economic behaviour of sunk cost effect. These effect is often manifested greatly
where a person continues on an endeavour once the person has invested effort, time or
money. The motivator to the continuation of the present decision is the prior investment, and
this happens even though it does not have to influence the decision. Therefore, the article
aims to give prove on the psychological justification as this behaviour is based on the need of
not appearing wasteful.
Arkes and Blumer analysed the sunk cost effect using three stages. First was the
demonstration of how the outcome will be presented followed by explanations to those
effects and finally the relation that exists between the sunk social psychological research and
cost effect. They demonstrated the sunk cost effect using ten experiments which were
conducted on Ohio and Oregon college students. The first experiment involved the giving
subscribers’ discounts to subscribers to a theatre series in Wisconsin and Michigan with the
expectation that most people will buy tickets to Wisconsin. However, it disconfirmed the
economic theory used traditionally that all the subjects will choose Wisconsin trip.
The second experiment involved selling three tickets with the first having the normal
price of $15, second with $2 discount and the third at $7 discount. The results demonstrated
possession of different sunk costs though it lasted for only six months. Experiment 3 involved
asking two kinds of questions to respondents whether there should be a continuation in
investing in a project where millions have already been spent and the other where no money
had yet been invested. From the respondents, most of them preferred continuing spending
than the beginning.

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The fourth experiment was similar to the third only that, the responses involved using
scale 0 to 100. Most of them estimated that the completed project would be a success.
Moreover, the story in experiment five was same as 3B, and the majority of the respondents
preferred construction not to take place. Arkes and Blumer further showed the relation
between sunk cost effects with other theories. These are cognitive dissonance theory, low-ball
techniques and entrapment theory. All these three theories corresponded to the sunk cost
effect (Freedman & Fraser). The total number of experiments conducted by Arkes and
Blumer was ten. Experiments six to ten were done just like the others to determine the
differences that existed in the sunk costs among different individuals. The main aim of all the
experiments conducted was to evaluate the sunk cost effect and how it is being manifested by
different individuals.
Therefore, Arkes and Blumer presented evidence suggesting that the sunk cost theory
is a robust judgement error. This was supported by a report from Thomas (1981) when he
experienced problems in his electric pump invention. However, he increased his plant output
and was able to succeed as most of his costs were sunk costs. Thus, this proves that, to place
sunk costs in a proper perspective, it is wise to increase your production while using less
manufacturing costs.

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References
Thomas, R. P. (1981). Microeconomic applications: understanding the American economy.
Belmont, CA: Wadsworth.
Freedman, J. L., & Fraser , s. (1996). Compliance without pressure:The foot-in-the-dooor
technique. Journal of personality and social psychology, 4, 195-202.