The Psychology of the Sunk Cost Effect: A Primer for Accounting Educators

• In Event: Teaching Resources: Managerial and Cost Accounting

Abstract

A fundamental concept taught in management accounting courses is that sunk costs are irrelevant for organizational decision making. However, a large body of research indicates that organizational decision makers are often influenced by sunk costs such that they choose different decision alternatives than they would have had they considered only relevant costs and benefits. The most common manifestation of this sunk cost effect is that decision makers favor decision alternatives in which a substantial resource investment has already been made. The purpose of this paper is to inform accounting educators about the psychology of the sunk cost effect, an issue that is not adequately addressed in management accounting instruction or textbooks. The paper discusses various psychological mechanisms that have been proposed to explain the sunk cost effect as well as strategies that accounting educators and organizations can employ to reduce the incidence of this phenomenon. The background presented here should benefit accounting educators, who often provide future organizational decision makers with their first instruction regarding sunk costs.

Author

• Nace R Magner, Western Kentucky University