Sunk cost accounting refers to the empirical finding that individuals tend to let their \ndecisions be influenced by costs made at an earlier time in such a way that they are \nmore risk seeking than they would be had they not incurred these costs. Such \nbehaviour violates the axioms of economic theory which states individuals should \nonly consider incremental costs and benefits when executing investments. This \ndissertation is concerned whether the pervasive sunk cost phenomenon extends to \ncorporate acquisitions and financial markets. 122 students from the University of St \nAndrews participated in three experiments exploring the use of sunk costs in \ninteractive negotiation contexts and financial markets. Experiment I elucidates that \nsubjects value the sunk cost issue higher than other issues in a multi-issue negotiation. \nExperiment II illustrates that bidders are influenced by the sunk costs of competing \nbidders in a first price, sealed-bid, common-value auction. In financial markets their \nexists an analogous concept to sunk cost accounting known as the disposition effect. \nThis explains the tendency of investors to sell “winning” stocks and hold “losing” \nstocks. Experiment III demonstrates that trading strategies in an experimental equity \nmarket are influenced by a pre-trading brokerage cost. Not only are subjects \ninfluenced in the direction that reduces the disposition effect but also trading is \ndiminished. Without the brokerage cost there was a significant disposition effect. \n \nJEL-Classifications \nC70, C90, D44, D80, D81, G11
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