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Abstract
Background
The sunk cost effect is the scenario when individuals are willing to continue to invest capital in a failing project. The purpose of this study was to explain such irrational behavior by exploring how sunk costs affect individuals’ willingness to continue investing in an unfavorable project and to understand the role of cognitive dissonance on the sunk cost effect.
Methods
This study used an experimental questionnaire survey on managers of firms listed on the Taiwan Stock Exchange and Over-The-Counter.
Results
The empirical results show that cognitive dissonance does not mediate the relationship between sunk costs and willingness to continue an unfavorable investment project. However, cognitive dissonance has a moderating effect, and only when the level of cognitive dissonance is high does the sunk cost have significantly positive impacts on willingness to continue on with an unfavorable investment.
Conclusion
This study offers psychological mechanisms to explain the sunk cost effect based on the theory of cognitive dissonance, and it also provides some recommendations for corporate management.
Supplementary materials
Figure S1 An example of the experimental scenarios
Acknowledgments
Special thanks to Ms Shu-Li Peng for her assistance in the research and the reviewers’ valuable comments on the improvement of this study.
Disclosure
The authors report no conflicts of interest in this work.