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Sunk Cost Fallacy in Driving the World's Costliest Cars

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  • Ho, Teck Hua
  • Png, Ivan P. L.
  • Reza, Sadat

Abstract

We develop a behavioral model of durable good usage with mental accounting for sunk costs. It predicts higher-than-rational usage that attenuates at a rate that increases with sunk costs. Singapore government policy varied the sunk cost of buying a new car. Using Singapore data, we estimate the elasticity of driving with respect to sunk costs to be 0.048, which implies that government policy between 2009 and 2013 was associated with 86 kilometers per month, or 5.6%, more driving. The results are robust to specifying sunk costs as relative to buyer income and estimation with Hong Kong data. We believe this to be the first field evidence of the sunk cost fallacy in usage of a major durable good.

Suggested Citation

  • Ho, Teck Hua & Png, Ivan P. L. & Reza, Sadat, 2017. "Sunk Cost Fallacy in Driving the World's Costliest Cars," MPRA Paper 82139, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:82139
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    References listed on IDEAS

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    Cited by:

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    3. James M. Carson & Cameron M. Ellis & Robert E. Hoyt & Krzysztof Ostaszewski, 2020. "Sunk Costs and Screening: Two‐Part Tariffs in Life Insurance," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 87(3), pages 689-718, September.
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    6. Keefer, Quinn A.W., 2019. "Decision-maker beliefs and the sunk-cost fallacy: Major League Baseball’s final-offer salary arbitration and utilization," Journal of Economic Psychology, Elsevier, vol. 75(PB).

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    More about this item

    Keywords

    sunk costs; mental accounting; behavioral economics; durable goods; consumer choice;
    All these keywords.

    JEL classification:

    • D4 - Microeconomics - - Market Structure, Pricing, and Design

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