Literature Review: Mark217

1. Journal Article Name: Throwing good money after bad: The effect of sunk costs on the decision to escalate commitment to an ongoing project.

Link To Journal: http://psycnet.apa.org/journals/apl/75/6/728/

Journal Name: Journal of applied psychology

Raking of Article: A*

Abstract/description of Article:

" This article speaks about how individuals work when they have to choose between 2 situations which is continuing an investment or withdrawing from that investment were you have already incurred certain costs.

" Garland and Newport carried out two experiments, namely Absolute Sunk Cost and Relative Sunk Cost, in which sunk cost was examined from Information Processing Perspective.

" In both the experiments, answers were found but it still wasn't enough and hence more research was carried out to address 3 questions. Here the researcher tries to manipulate the sunk cost parametrically.

" The article uses 407 undergrad business students who are from a large State University in Southwestern US, studying Introductory Management and Behavioral Science. They are all Aged 18 and above.

Measurements/Questions asked in the Article:

" A single decision scenario based on an original scenario developed by Arkes and Blumer (1985) and modified by Garland and Newport (in press) was used. Five versions of the scenario were developed to represent five different levels of sunk cost. The scenario was as follows:

You are the President of Aero-Flite Corporation, an airplane manufacturer. You have spent - million dollars of the 10 million dollars budgeted for a research project to develop a radar scrambling device that would render a plane undetectable by conventional radar (in effect a radar-blank plane). The project is ___ % complete. Another firm has begun marketing a similar device that takes up much less space and is much easier to operate than Aero-Flite's.

The five different scenarios specified that $1, $3, $5, $7, or $9 million had been spent and that the project was 10%, 30%, 50%, 70%, or 90% complete.

" In addition to variation in sunk costs, three dependent-measure conditions were created to accompany each scenario. One group of subjects was asked the following question: "How likely is it that, if faced with this situation, you personally would decide to use the last ___ million dollars to complete this project?" This dependent measure was a replication of that used by Garland and Newport (in press) and, as indicated earlier, creates an incremental cost that is inversely proportional to sunk costs. A second group of subjects was asked: "How likely is it that, if faced with this situation, you personally would authorize the next million dollars to continue with the project?" With this dependent measure, incremental costs are constant across sunk costs. A third group of subjects was asked: "How likely is it that if you decided to complete this project using the last ___ million dollars of your budget, your company would realize a profit?"

" Subjects in all groups circled a single point along a 100-point subjective probability scale. The endpoints of the scale were marked definitely would not authorize the expenditure (1) and definitely would authorize the expenditure (100) or definitely would not be profitable (1) and definitely would be profitable (100), as appropriate; the midpoint was marked even chance.

.

Findings:

" The results are divided into 3 experimental studies, one for each condition.

" It seems like the responses on an average believe that each Dependent Measure reveal that respondents who were supposed to respond if there is a likelihood of profit said they weren't so certain about it.

" Also the respondents who were asked if the likelihood of them authorizing the $1 million or all the remaining money had the similar answer which was, they are less certain about it.

" It was also observed that the dependent measures increase with sunk cost.

" The results also portray the interaction between sunk costs and dependent measures. The analysis on the interaction are furthermore divided in 3 parts:

a. Probability of Authorizing All Remaining Budget Funds

b. Probability of Authorizing the next $1 Million

c. Perceived Probability of Profit

2. Journal Article Name: The mental accounting of sunk time costs: why time is not like money

Link to Journal Article: http://onlinelibrary.wiley.com/doi/10.1002/bdm.370/full

Journal Name: Journal of behavioral decision making

Ranking of Journal: A

Abstract/Description of Article:

" In this article, the writer is trying to study the effect of past investments on current decisions.

" Through the experiments being carried out in this paper, he finds that in the first 3 experiments there is no sunk cost effect on time isn't observed but as soon as there is money being added to the scenario, there is effect being observed.

" The author also feels that this happens because people cannot account time the same way as they account for money.

" 122 undergrad students from the Hong Kong University of Science and Technology were selected as respondents for this study. They were given either the sunk cost of time or sunk cost of money situation. ( This is applied to the first 3 experiments.)

Measurement/ Questions used in Article:

" In this article, there are 6 different experiments which have been carried out.

" Experiment one : Here a student is given a scenario where he works for 2 professors, 15 hours for one and 5 hours for the other one and in return gets concert tickets to 2 different shows, one is for front row seats for professional theater performance and the other one is the rock concert, which are scheduled at the same day. The ticket isn't transferable and it cannot be exchanged either. The student has to now make a choice between both of them. (Soman 169-185)

" Experiment two: Here