Sunk Cost Fallacy in Driving the World's Costliest Cars

Ho, Teck Hua and Png, Ivan P. L. and Reza, Sadat (2017): Sunk Cost Fallacy in Driving the World's Costliest Cars. Published in: Management Science (2 March 2017)

Abstract

We develop a behavioral model of durable good usage with mental accounting for sunk costs. It predicts higher-than-rational usage that attenuates at a rate that increases with sunk costs. Singapore government policy varied the sunk cost of buying a new car. Using Singapore data, we estimate the elasticity of driving with respect to sunk costs to be 0.048, which implies that government policy between 2009 and 2013 was associated with 86 kilometers per month, or 5.6%, more driving. The results are robust to specifying sunk costs as relative to buyer income and estimation with Hong Kong data. We believe this to be the first field evidence of the sunk cost fallacy in usage of a major durable good.

• Item Type: MPRA Paper
• Language: English
• Keywords: sunk costs, mental accounting, behavioral economics, durable goods, consumer choice
• Subjects: D - Microeconomics > D4 - Market Structure, Pricing, and Design

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