The psychology of sunk cost: A classroom experiment

Abstract

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.