The Impact Of Sunk Outcomes On Risky Choice Behaviour

Abstract

This paper examines the impact of historical or stmk outcomes on the framing of risky choice problems. Two conflicting views exist in the literature about framitig stich sunk outcomes: framing based on the minimal account (where sunk outcotnes arc ignored) and framing based on the psychological account (where sunk outcomes are somehow included in the decision process). Several studies are reviewed in order to identify the ratiotiale for the two cotiflicting views of framing and to isolate some of the factors that are of potential importance in determining the appropriate decision frame of sunk outcome problems. Results of an exploratory experiment on framing of risky choice problems with sixty professional managers arc also reported. In general, these results suggest a rather extensive use of the psychological account for both personal and corporate decisions, for continue/ discontinue problems and asset disposal problems, and for sunk betiefits as well as sunk costs. Experimental results also indicate that predicting the impact on risky choices from use ofthe psychological account is not a simple issue. Prospect theory, as a basis of prediction, was only partially successful and in some cases predicted poorly. The concept of affect (or mood state) was found to add to the ability to explain results in some cases.

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