Monday, May 13, 2013
4:00 pm

Ulric B. and Evelyn L. Bray Seminar

Sunk Cost Fallacy in Driving the World’s Costliest Cars
Teck-Hua Ho, William Halford, Jr. Family Chair in Marketing, Haas School of Business, UC Berkeley

Do decision-makers suffer from the sunk cost fallacy in high-stakes situations?  We develop a behavioral model of usage of a durable good with mental accounting for sunk costs.  It predicts that the usage increases with the sunk cost, and attenuates with time at a rate that increases with the sunk cost.  The model nests conventionally rational behavior as a special case. 

We take the model to a panel of 6,474 cars between 2001-2011 in Singapore.  During that period, the sunk cost involved in a new car purchase varied substantially with the continuing government policy.  We found robust evidence of a sunk cost fallacy.  The elasticity of usage with respect to the sunk cost was 0.563(±0.072). An increase in the sunk cost by $4,500 (the outcome of government policy between 2009 and 2010) would have been associated with an increase in monthly usage by 147 kilometers or 8.8%.  Our results were robust to various checks including alternative controls for selection, differences in specification, and allowing for heterogeneity in engine size and target cumulative usage.

Contact Barbara Estrada at Ext. 4083
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