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Purpose The purpose of this paper is to develop a systematic literature review on the sunk cost effect from consumers’ perspectives. By applying a comprehensive approach, this paper aims to synthesise and discuss the impact of financial and behavioural sunk costs on consumers’ decisions, judgements and behaviour before and after purchasing. This study also identifies potential research avenues to inspire further studies. Design/methodology/approach Following a search in the Scopus and Web of Science databases, a systematic literature review was conducted by identifying and analysing 56 peer-reviewed articles published between 1985 and 2022 (November). Descriptive and content analysis was implemented based on the selected papers to examine and synthesise the effect of sunk costs on consumers’ choices, evaluations and actions in a comprehensive approach; uncover research gaps; and recommend paths for future research. Findings The research results found in the literature are discussed according to five related themes: factors affecting the sunk cost effect; the impact of past investments on purchasing decisions; consumers’ post-purchasing evaluation, behaviour and choices; the mental amortisation of price; and the sunk cost effect on loyalty and switching. Originality/value The originality of this study lies in the comprehensive approach to the sunk cost effect from consumers’ perspectives. This review paper synthesises and discusses the research results found in the literature related to financial and behavioural sunk costs that can influence consumers’ decisions, judgements and behaviour before and after paying for a good or service.

The sunk cost effect has been widely observed in individual decisions. Building on an intrapersonal self-management game, the paper theoretically shows that the sunk cost effect may stem from an attempt to overcome the underinvestment problem associated with a high degree of present bias or to resolve the multi-selves coordination problem when the degree of present bias is low. Especially for individuals with severe present bias, the current self may take a costly action (which is a sunk cost for the future self) to signal the individual’s high success probability that motivates his future self-disciplining behaviors. In equilibrium, a higher level of sunk cost is more likely to give rise to a higher probability for the individual to continue the project. We then conduct a laboratory experiment. The empirical findings are consistent with our theoretical implications. The online appendix is available at https://doi.org/10.1287/mnsc.2018.3032 . This paper was accepted by Juanjuan Zhang, marketing.

Information goods often adopt a subscription-based business model, where customers pay a fixed fee to enter into a purchase agreement. The up-front payment of the subscription fee creates a sunk cost for members, which may influence their future consumption behavior. Although price adjustment is a common strategy employed by subscription providers, it remains unclear how changes in the fixed fee—as a sunk cost—affect the consumption of information goods. For this paper, we first leveraged a quasi-natural experiment in a movie subscription service and employed a difference-in-differences model to estimate the impact of fixed fee adjustments on overall consumption. Then we used a randomized experiment to unveil the underlying mechanism of sunk cost fallacy. Our findings reveal that the average treatment effect on information goods consumption is both significant and economically meaningful. Specifically, the box office revenues of an average movie increased by 12%~35% in the six months following a sudden downward price adjustment, likely because a lower fixed subscription fee appeals to highly price-conscious consumers, who are more susceptible to the sunk cost fallacy. We also uncovered insightful heterogeneous effects, demonstrating that niche information goods, especially those driven by narrow appeal and high quality, benefit the most from such a downward price adjustment of a subscription service. Our results are robust to alternative control groups, placebo tests, and different data analysis granularity. Our research enhances the understanding of the sunk cost fallacy within the context of subscription-based information goods.

In uncertain environments, project reviews provide an opportunity to make “continue or abandon” decisions and thereby maximize a project’s expected payoff. We experimentally investigate continue/abandon decisions in a multistage project under two conditions: when the project is reviewed at every stage and when review opportunities are limited. Our results confirm findings in the literature that project abandonment tends to be delayed; yet, we also observe premature termination. Decisions are highly path dependent; in particular, subjects are more likely to abandon after observing reduced project value, and abandonment rate is higher near the middle—rather than near the beginning or end—of a project. Interestingly, when reviews are limited, subjects are less likely to continue a project that should be abandoned. At the same time, subjects are more inclined to review again after receiving negative (rather than positive) news. Our data are explained well by a model that incorporates three behavioral concepts—gains or losses from comparing the project value with an internal adaptive reference point, sunk cost bias, and status quo bias. Our work suggests that more frequent reviews need not lead to better project performance, and it also identifies contexts in which outside intervention is most valuable in project decision making. This paper was accepted by Gad Allon, operations management.

Sunk cost bias is a pervasive problem in consumer decision making. It occurs when people continue to invest resources toward unsuccessful outcomes merely because they previously invested in them. This tendency exists because people devote too much attention to prior investments without considering how other factors may impact their decision outcome. While many suggested interventions to attenuate sunk cost bias involve altering cognitive processes, we examine an alternate affective route. Specifically, we propose that inducing positive affect attenuates sunk cost bias by naturally facilitating flexible thought processes. Across four studies, using hypothetical and real decision tasks, we find that positive affect induced in three different ways consistently attenuates sunk cost bias involving money, time, and effort investments. Further, we demonstrate that this occurs because people experiencing positive affect have enhanced cognitive flexibility. They consider more relevant decision factors and perceive sunk cost as having less of an influence on their decision outcomes. Then, in a fifth study, we show that a thought intervention promoting flexibility can attenuate consumers’ suboptimal commitment tendency in a field setting.

This paper studies price competition between the online and offline channels under the effects of showrooming and the sunk cost effect. Consumers who are uncertain about their product valuation might examine the product in a physical store but then switch to buying from the online store at a lower price (i.e., showrooming). We consider the sunk cost effect in a setup involving two competing stores -- online vs. physical -- and consumers that have valuation uncertainty and heterogeneous preferences about visiting the physical store. Our results suggest that the online store may be better off if it targets only one type of consumer -- either direct buyers or switchers, but not both. However, the online store can only do so under strict conditions, so it is more likely to engage in fierce price competition with the physical store to pursue switchers. We also find that high transportation cost may benefit both stores in most circumstances, but more so for the physical store because of the sunk cost effect. Higher sunk cost effect allows both stores to charge higher prices in certain circumstances. In sum, while showrooming is more likely to aggravate the competition, the sunk cost effect might mitigate the competition, benefiting both stores.

Transition from one economic equilibrium to another as a consequence of shocks is often associated with sunk adjustment costs. Firm-specific sunk market entry investments (or sunk market exit costs) in case of a reaction to price shocks are an example. These adjustment costs lead to a dynamic supply pattern similar to hysteresis. In analogy to \"hysteresis losses\" in ferromagnetism, the authors explicitly model dynamic adjustment losses in the course of market entry and exit cycles. They start from the micro level of a single firm and use explicit aggregation tools from hysteresis theory in mathematics and physics to calculate dynamic losses. The authors show that strong market fluctuations generate disproportionately large hysteresis losses for producers. This could give a reason for the implementation of stabilizing measures and policies to prevent strong (price) variations or, alternatively, to reduce the sunk entry and exit costs.

Nature abounds with a rich variety of altruistic strategies, including public resource enhancement, resource provisioning, communal foraging, alarm calling, and nest defense. Yet, despite their vastly different ecological roles, current theory typically treats diverse altruistic traits as being favored under the same general conditions. Here, we introduce greater ecological realism into social evolution theory and find evidence of at least four distinct modes of altruism. Contrary to existing theory, we find that altruistic traits contributing to \"resource-enhancement\" (e.g., siderophore production, provisioning, agriculture) and \"resource-efficiency\" (e.g., pack hunting, communication) are most strongly favored when there is strong local competition. These resource-based modes of helping are \"K-strategies\" that increase a social group's growth yield, and should characterize species with scarce resources and/or high local crowding caused by low mortality, high fecundity, and/or mortality occurring late in the process of resource-acquisition. The opposite conditions, namely weak local competition (abundant resource, low crowding), favor survival (e.g., nest defense) and fecundity (e.g., nurse workers) altruism, which are \"r-strategies\" that increase a social group's growth rate. We find that survival altruism is uniquely favored by a novel evolutionary force that we call \"sunk cost selection.\" Sunk cost selection favors helping that prevents resources from being wasted on individuals destined to die before reproduction. Our results contribute to explaining the observed natural diversity of altruistic strategies, reveal the necessary connection between the evolution and the ecology of sociality, and correct the widespread but inaccurate view that local competition uniformly impedes the evolution of altruism.

The previous research on the role sunk costs play in the National Basketball Association (NBA) has come to mixed conclusions. We use a direct measure of sunk costs, player compensation, and a quasi-experimental method that considers the endogenous relationship between compensation and productivity. Using the spike in salary cap for the 2016–2017 season, from new television broadcasting contracts, we find compensation has a significant effect on playing time. Specifically, we use players signing free agent contracts in 2015–2016 or 2016–2017. For both groups, we analyze the change in salary from the pre-contract season to the post-contract season. Using the difference-in-differences, we find the inflated salary cap, from the new television contracts, increased player compensation by 81.7%, on average. Instrumental variables estimations show the increase in compensation significantly affects playing time. The change in salary yields an additional 1.93 min played per game, which is approximately equal to the effect of a one-standard deviation increase in contemporaneous productivity. Furthermore, we find that our conclusions are robust to the use of various advanced analytical measures or traditional box-score statistics.

Economics and business students are taught that sunk costs are irrelevant to their decisions. Yet, there is ample evidence that managers fail to integrate this simple rule and fall prey to what is known as the sunk-costs bias. To mitigate cognitive biases, such as the sunk-cost bias, educators must raise students' awareness of these common judgment errors. In this article, the author proposes a classroom activity that actively engages students and allows them to identify this bias in their own judgments. The activity builds on a series of experiments from the psychology literature. The author discusses how these experiments have been adapted for classroom use and presents evidence suggesting that the activity increased students' awareness of the sunk-cost bias and improved their decision-making skills.