Trapped by Past Investments: Understanding the Sunk Cost Fallacy in Consumer Behavior
Wen Zhang
Co-Presenters: Haoyang Yu
College: College of Business and Public Management
Major: Economics
Faculty Research Mentor: Eli Kochersperger
Abstract:
The sunk cost fallacy is a cognitive bias in which individuals persist in an action due to prior investments of time, money, or effort, rather than evaluating future benefits. This behavior often leads to irrational financial decisions, such as continuing an unused gym membership, holding onto outdated technology, or refusing to abandon an expensive yet unsatisfactory product. Arkes and Blumer (1985) argue that people feel compelled to justify past investments, making the study of this fallacy critical in understanding consumer behavior.This research investigates the extent of the sunk cost fallacy in purchasing decisions through a survey of 200 consumers and an experiment using hypothetical spending scenarios. Results indicate that 68% of participants continued their investment due to previous financial commitments. Older individuals (46+) were found to be more susceptible (80%), while brand-loyal consumers were 85% more likely to persist with a purchase despite dissatisfaction. These findings align with Thaler’s (1999) mental accounting theory, which suggests that consumers psychologically categorize past spending as commitments, affecting future decisions.The study highlights the significant influence of sunk costs on consumer behavior, often leading to suboptimal financial choices. Businesses leverage this bias in pricing strategies, subscription models, and brand loyalty programs. Policymakers and financial educators should address consumer awareness to promote rational decision-making. Understanding when and why consumers fall for the sunk cost fallacy can lead to better financial literacy and smarter purchasing habits.