How does cognitive dissonance influence the sunk cost effect?

Abstract

BACKGROUND: The sunk cost effect is the scenario when individuals are willing to continue to invest capital in a failing project. The purpose of this study was to explain such irrational behavior by exploring how sunk costs affect individuals' willingness to continue investing in an unfavorable project and to understand the role of cognitive dissonance on the sunk cost effect. METHODS: This study used an experimental questionnaire survey on managers of firms listed on the Taiwan Stock Exchange and Over-The-Counter. RESULTS: The empirical results show that cognitive dissonance does not mediate the relationship between sunk costs and willingness to continue an unfavorable investment project. However, cognitive dissonance has a moderating effect, and only when the level of cognitive dissonance is high does the sunk cost have significantly positive impacts on willingness to continue on with an unfavorable investment. CONCLUSION: This study offers psychological mechanisms to explain the sunk cost effect based on the theory of cognitive dissonance, and it also provides some recommendations for corporate management.

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