Mnemonomics: The Sunk Cost Fallacy as a Memory Kludge

Sandeep Baliga () and Jeffrey Ely

American Economic Journal: Microeconomics, 2011, vol. 3, issue 4, 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)

JEL-codes: D24 D83 G31 (search for similar items in EconPapers)
Date: 2011
Note: DOI: 10.1257/mic.3.4.35
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Citations: View citations in EconPapers (40)

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