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How does cognitive dissonance influence the sunk cost effect?
Shao-Hsi Chung1, Kuo-Chih Cheng2
1Department of Business Administration, Meiho University, Pingtung, Taiwan.
The sunk cost effect, where individuals continue investing in failing projects, is moderated by cognitive dissonance. High dissonance amplifies the impact of sunk costs on continued investment decisions.
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Area of Science:
- Behavioral Economics
- Cognitive Psychology
- Organizational Behavior
Background:
- The sunk cost effect describes continued investment in failing ventures.
- This behavior appears irrational, prompting investigation into its underlying psychological mechanisms.
Purpose of the Study:
- To explore how sunk costs influence continued investment in unfavorable projects.
- To determine the role of cognitive dissonance in the sunk cost effect.
Main Methods:
- Experimental questionnaire survey design.
- Involved managers from firms listed on the Taiwan Stock Exchange and Over-The-Counter markets.
Main Results:
- Cognitive dissonance does not mediate the sunk cost effect.
- Cognitive dissonance moderates the sunk cost effect; high dissonance strengthens the impact of sunk costs on continued investment.
Conclusions:
- Psychological mechanisms explaining the sunk cost effect via cognitive dissonance theory are proposed.
- Recommendations for corporate management practices are provided.
