Sunk cost effect and the allocation of resources

Normative principles imply that decisions should be based solely on incremental costs and benefits. Nevertheless, there is a greater tendency to continue an endeavor once an investment has been made, a phenomenon which is labelled the sunk cost effect. In the present study, the sunk cost effect was replicated when money had already been invested. More:importantly, a sunk cost effect was also found when time had already been invested. In four hypothetical scenarios, bank employees were faced with the choice between two alternatives. One alternative was presented as being clearly better than the other. For the less-preferred alternative, either money or time had been invested, whereas no prior investments had been made in the preferred alternative: In line with the sunk cost effect, most of the respondents chose the less-preferred alternative, indicating that prior investments affected their decisions.