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American Economic Journal: Microeconomics: Vol. 3 No. 4 (November 2011)
AEJ: Micro Volume. 3, Issue 4 | 
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AEJ: Micro Forthcoming Articles
Mnemonomics: The Sunk Cost Fallacy as a Memory Kludge
Article Citation
Baliga, Sandeep, and
Jeffrey C. Ely. 2011. "Mnemonomics: The Sunk Cost Fallacy as a Memory Kludge."
American Economic Journal: Microeconomics,
3(4): 35-67.
DOI: 10.1257/mic.3.4.35
DOI: 10.1257/mic.3.4.35
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)
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Full-text Article
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Authors
Baliga, Sandeep (Northwestern U)
Ely, Jeffrey C. (Northwestern U)
Ely, Jeffrey C. (Northwestern U)
JEL Classifications
D24: Production; Cost; Capital, Total Factor, and Multifactor Productivity; Capacity
D83: Search; Learning; Information and Knowledge; Communication; Belief
G31: Capital Budgeting; Fixed Investment and Inventory Studies; Capacity
D83: Search; Learning; Information and Knowledge; Communication; Belief
G31: Capital Budgeting; Fixed Investment and Inventory Studies; Capacity
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