Effects of Absolute and Relative Sunk Costs on the Decision to Persist with a Course of Action

Two experiments were designed in order to examine how D. Kahneman and A. Tversky’s (1979, 1984) assertions from prospect theory, that mental accounts are organized topically, might relate to sunk cost effects in decisionmaking. In each experiment, the absolute magnitude (dollars) and the relative magnitude (dollars in proportion to an overall project budget) of sunk costs were manipulated independently across four different decision problems. Subjects responded to each problem with the probability that if faced with the situation described, they would commit the remaining funds to the action that they had initiated. The subjects in Experiment 1 were undergraduate business students, fulfilling a course requirement. Those in Experiment 2 were MBA students, participating on a purely voluntary basis. Very consistent findings emerged across both experiments, where relative rather than absolute magnitude of sunk costs had a significant impact on subjects’ reported likelihood of committing additional funds to some action. These findings support the idea that a topical organization of mental accounts, where existing investments are compared with a reference state in a manner consistent with that prescribed by prospect theory, underlies sunk cost effects in decision-making. Q 1991 Aca-