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Honoring Sunk Costs- Psychological Perspectives
From a psychological perspective, sunk costs are those non-refundable amounts of time, money, emotions and other human assets which cannot be returned, therefore, they are quite literally costs which provide negative feedback because they have been financially, emotionally and physically wasted. In psychology, sunk costs are also related to escalation of commitment, also known as irrational escalation or commitment bias, which is not rational because sunk costs are irretrievable and cannot affect consequences of one’s future decisions. Yet, one still feels a sense of commitment to something in which he has invested time, effort, money, etc.
For example, one is completing an online survey which begins to malfunction and freeze halfway through. The participant keeps going, however, no matter how time-consuming, useless and frustrating it is. The driving force behind this emotionally and time-wasteful action is the idea of honoring sunk costs. The time and effort, not to mention frustration, already invested into the survey should have no bearing on the decision to quit the survey. Ultimately, it would be wrong to say that one should keep doing the survey because time and effort has already been invested into it. The time and effort are both sunk costs which cannot be retrieved.
While sunk costs should not affect the future consequences of a present decision, they should be taken into account when it comes to making assessments about future outcomes, reputational damage or future probabilities and possibilities. In other words, it is irrational to honor sunk costs unless the abandonment causes problems in the future which outweigh the benefits of deserting sunk costs.
Description
A sunk cost differs from a loss; on the other hand, it is a rule of waste not, want not. A loss is a detriment, disadvantage or deprivation from failure to keep something, but a sunk cost is an irrevocable investment which increases further losses. There is a strong positive relationship between the degree of sunk costs and willingness to dedicate further time and effort. This can be demonstrated in the form of someone who has just pre-paid for an all you can eat buffet; now he has a substantial reason to stuff his stomach to the point of disgust. Ultimately, the money one paid for the buffet is not pertinent to future outcomes while the fact that one’s stomach hurts is.
Escalation of Commitment- A Psychological Real-Life Phenomena
Several rationalizations for the escalation of commitment have been proposed. The first one is that escalation of commitment emerges when one oversimplifies the “do not waste” decision rule. Some are so psychologically attached to time, effort or money that the thought of wasting any of it is quite overbearing. Another explanation comes from the fact that individuals have a need for self-justification to self or others. Yet another explanation has to do with the idea that discontinuing or continuing a certain action is related to the choice between a sure and unsure loss. According to Kahneman and Tversky (1979) and prospect theory, people are essentially, risk-seekers.
Conversely, it has been shown that people sometimes stop an action or de-escalate commitment when responding to sunk costs. The above explanations do not suffice when it comes to explaining this phenomenon. On a psychological basis, there have been four proposed explanations for honoring sunk costs in terms of the escalation of commitment. The four proposed task dimensions which affect commitment decisions are:
1.) Type of decision goal- representation of desired outcomes
2.) Nontransparency of sunk costs- how overt prior investments are (sunk costs can be hidden or easy to recognize)
3.) Time-line of sunk costs- when sunk costs will happen in relation to end time of project
4.) Accountability- the degree to which individuals have to explain and justify their decision to others
Although the effects of these four dimensions are not always direct, they are, nonetheless, entrenched in decision-making and honoring sunk costs which in turn affect the escalation of commitment.
Sunk Costs- Individual Differences
Research has focused on how individual differences as evident in personality traits have an effect on various ways individuals respond to sunk costs. While there is little evidence that any consistent personality traits play a major role in escalation of commitment, Knight and Nadel (1986) found that individuals who tend to be overconfident and have high self-esteem while doing little research about the information at hand were more likely to have escalated commitment than those with low self-esteem. There is also a relationship between self-efficacy and escalation of commitment (Whyte, Saks, & Hook, 1997); Deci and Ryan (1995) found that individuals who thought they were going to receive negative feedback in the form of a threat or demand had a higher escalation of commitment than those who thought that negative feedback would be the fault of the performer. In other words, personality traits and expectations were some of the aspects which determined how a person’s committment would escalate.
For example, Schaubroeck and Williams (1993b) found that individuals with a Type A personality are more prone to honor sunk costs due to greater sensitivity to judgment and evaluation of performance. Type A individuals need a greater justification for negative results, thus making them more likely to honor commitments and sunk costs. Paralleling this is the finding that Type A personalities take responsibility more seriously and honor sunk costs more when responsibility is high versus when it is low.
Example
One of the classic examples of honoring sunk costs as well as the escalation of commitment is waiting in line. Two groups of people with two different goals were waiting in line; time already spent waiting in line (sunk cost) was more significant when the goal was less pleasant. When people have to wait in line, they consequentially cope with delays that impede their goals. Those who wait in line are also able to control how they feel and their behavior while waiting. As soon as someone gets in line, he must stick with the decision unless he chooses to leave; how attractive the end goalis for standing in line varies for all individuals, but everyone has the ability to change his motivations for particular tasks. When people are uncertain about the outcome of standing in line, they are inclined to underestimate the amount of time left until it is their turn.
Time already spent in line can either be viewed as a positive psychological investment or a potential waste (sunk cost). What has been established is that when the end goal seems less appealing, it is harder to block out negative feelings associated with sunk costs. However, these negative feelings are offset by motivational properties of sunk costs. Ultimately, waiting in line has been defined as a psychological trap where people are dedicated to the process of escalation of commitment- the more time spent waiting, the more motivation to justify their initial decision to get in line in the first place, the higher commitment to honor the sunk cost of wasted time, effort and energy. Time wasted is just that- time wasted!
See also
References
1. Deci, E. L., & Ryan, R. M. (1985). Intrinsic motivation and self-determination in human behavior. New York: Plenum.
2. Fox, S. & Hoffman, M. (2002). Basic and Applied Social Psychology, 24(4), 273-285.
3. Juliusson, Á., Karlsson, N., & Gärling, T. (2005). Weighing the past and the future in decision-making. European Journal of Cognitive Psychology, 17(4), 561-575.
4. Julliuson, A. (2006). Optimism as modifier of escalation of commitment. Scandinavian Journal of Psychology, 47(5), 345-348.
5. Kahneman, D., & Tversky, A. (1979). Prospect theory: An analysis of decision under risk. Econo-metrica, 47, 263-291.
6. Karrlson, N., Juliusson, A., & Garling, T. (2005). A conceptualization of task dimensions affecting escalation of commitment. European Journal of Cognitive Psychology, 17(6), 835-858.
7. Knight, P. A., & Nadel, J. I. (1986). Humility revised: Self-esteem, information search, and policy consistency. Organizational Behavior and Decision Process, 38, 196-205.
8. Meyer, T. (1994). Subjective importance of goal and reactions to waiting in line. Journal of Social Psychology, 134(6), 819-827.
9. Schaubroeck, J., & Williams, S. (1993b). Type A behavior pattern and escalation commitment. Journal of Applied Psychology, 78, 862-867.
10. Thames, E. A. (1996). The sunk-cost effect: The importance of context. Journal of Social Behavior & Personality, 11(4), 817-826.