Decision-maker beliefs and the sunk-cost fallacy: Major League Baseball’s final-offer salary arbitration and utilization

We use Major League Baseball final-offer arbitration (FOA) to analyze how sunk costs affect high stakes decisions while controlling for the beliefs of the decision maker. FOA gives us an explicit measure of a team’s beliefs; the team’s final offer is a direct measure of its perceived value of the player. Using an instrumental variables approach, we find salary has a meaningful impact on player utilization, measured in plate appearances. FOA also allows us to directly compute the average treatment effect of FOA outcomes on compensation, and to therefore, examine the validity of our instrumental variables strategy. When a player’s request is chosen in FOA his compensation is 39% greater and he receives 35.6–45.2 additional plate appearances, 7.5–9.6% of the mean. Furthermore, we find arbitration hearings do not affect (i) team success through changing expenditures, (ii) individual productivity, (iii) team beliefs, or (iv) utilization prior to arbitration. Sunk costs have a significant effect, both statistically and economically, on high stakes decisions made by experts, even while controlling for beliefs.