Why choose wisely if you have already paid? Sunk costs elicit stochastic dominance violations

Abstract

Sunk costs have been known to elicit violations of expected utility theory, in particular, the independence or cancellation axiom. Separately, violations of the stochastic dominance principle have been demonstrated in various settings despite the fact that descriptive models of choice favored in economics deem such violations irrational. However, it is currently unknown whether sunk costs also yield stochastic dominance violations. In two studies using a tri-colored roulette wheel choice task with non-equiprobable events yet equal payoffs, we observed that those who had sunk costs selected a stochastically dominated option significantly more than did those who had no costs. Moreover, a second study revealed that people chose a stochastically dominated option significantly more when the expected value was low compared to high. A model comparison of psychological explanations demonstrated that theories that incorporate a reference shift of the status quo could predict these sunk cost-based violations of stochastic dominance whereas other models could not.

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