Throwing Good Money After Bad: Why Some Do So More Than Oth - PowerPoint Presentation

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Throwing Good Money After Bad: Why Some Do So More Than Others

This research was supported by a grant awarded to the second & third authors from the National Science Foundation (SES #0620094). This work is currently in preparation for submission. A copy of the manuscript, including full references and expanded discussion, is available at the first author’s website: http://jonwestfall.com/bdrm2010

Stephen

Christman

The University of Toledo

John D. Jasper

The University of Toledo

Jonathan E. Westfall

Columbia University

Note: The Title above is used as it was the title of this work at time of submission. The revised title is

Inaction Inertia, Sunk Cost, and Handedness: Avoiding the losses of past decisions

Conclusions

Over a series of 4 experiments, it was shown that that mixed-handers are more distressed by decisions associated with losses and show a different proclivity to update beliefs than strong-handers. In addition, the results of Experiment 4, suggest that mixed-handers are more likely than strong-handers to pursue sunk costs when the future fate of the project is not clear; when additional information is provided, unambiguously indicating that the project will fail, the handedness difference in sunk costs disappears.

In terms of theory, our results suggest that inaction inertia and sunk cost effects may result from similar mechanisms. Although seemingly different, both effects involve, at least implicitly, a past and a current decision as well as significant inertia – inaction in the former and action in the later case. Most importantly, both seem to be connected by a focus on losses, the negative thought one tries to avoid. From a practical standpoint, the finding that decisions in both inaction inertia and sunk cost contexts may be predicted by handedness suggests that including handedness (measured for strength, not direction) in decision making research may prove fruitful in explaining otherwise unaccounted for variance.

Text used in Experiment 4

Strength of Handedness

Handedness has long been recognized as an important individual difference, however the majority of previous research has focused on left versus right handers. It has become increasingly apparent that degree of handedness (being strongly one-handed versus being mixed-handed, i.e., using the non-dominant hand for at least a few activities) may be more important than direction of handedness.

Handedness is negatively correlated with the size of the corpus callosum, which we theorize allows greater interhemispheric communication among mixed-handers.

Inaction Inertia

Experiment 1The act of bypassing an initial action (e.g., the $40 discount or the sale price) decreases the chances an individual will choose subsequent similar actions (e.g., pursuing a $20 discount, or buying the item later at full price).Main effect of condition (Missed deal or got deal), F (1,185)=24.56, p < .001, η2 = .12. Individuals indicated they would be more likely (M = 7.4) to purchase the item when they had not missed the original deal (the control condition) than when they had missed the deal (M = 5.5). A Handedness by Condition interaction was found, F(1, 185)=4.25, p = .041, η2 = .02. Follow up analyses were conducted and revealed that while strong-handers showed a significant difference between received deal (M = 7.1) and missed deal conditions (M = 6.0), t(89) = 2.06, p = .04, d = .43, mixed-handers showed an even larger difference between the same conditions (M = 7.69 and M = 5.0, respectively), t(96) = 4.96, p < .001, d = .60. This indicates the inaction inertia effect is stronger for mixed-handers than for strong-handers.

Missed Deal Scenario

Sunk Cost Effects

Experiments 2-4

The tendency to continue to engage in a behavior after an initial investment of time or money has been made (

Arkes & Blumer, 1985). For example, suppose an individual is engaged in a project and finds out that, although nearly complete, the project will not be profitable for his/her company. Normative decision theory argues that a prior investment should not influence one’s consideration of current options; only the incremental costs and benefits of the current options should influence one’s decision. Thus, the project should be terminated. However, many individuals continue to fund the project seemingly in vain, and thus demonstrate the sunk cost effect. In 2 experiments, Mixed-handers showed either a greater preference to continue to project. It was not until the problem used was modified (in the third experiment) to include more information about the project’s odds of success that Mixed- and strong-handers had a similar pattern of results.

As a president of a relatively small factory in the health sector you are developing several new health products… Your factory has already made an investment.. you learn that one of the world’s largest suppliers of health products is also planning to introduce a medicine against migraine. Your marketing people tell you that there is an apt possibility that their medicine will outperform yours.

[It

is

clear that their medicine works faster, is more effective, and is far more economical than the medicine your company is developing.]

Now, what would you decide? Would you continue the development and introduction of the medicine against migraine? Or would you stop the migraine project, and use your remaining funds for development of an alternative product?