Sunk Cost Fallacy: Effect of Situational Knowledge on Irrational Choices

P. Balasubramanian; K. Kalyanasundaram; Aravindhan S

P. Balasubramanian Associate Professor, Amrita School of Business, Amrita University, Coimbatore, India
K. Kalyanasundaram Ph.D. Research Scholar, Amrita School of Business, Amrita University, Coimbatore, India
Aravindhan S Student, Amrita School of Business, Amrita University, Coimbatore, India

Keywords: Sunk Cost, Cognitive Biases

Abstract

Sunk cost fallacy or escalation of commitment is one of the cognitive biases referred as the characteristic of people justifying more investment because of the prior investment. Since the costs are beyond recovery, whether an action taken or not is irrelevant to the decision. Application of this theory in the field of
agriculture is very unique and this paper aims to establish the irrational choices adopted by the farmers in selecting a crop. We selected a region in the southern part of India where coconut is the main crop. We were interested in understanding the reason behind the farmers continuing with cultivation of coconut trees with the depletion of water table in the region. Two experiments were conducted one with the students and another with farmers to understand a) effect of situational knowledge on the choice of crop, b) difference between farmers and highly educated professionals in their decision on the choice of the crop with respect to a specific situational knowledge and c) difference between the “Coconut cultivating” farmers and the “Other crop cultivating” farmers on the reason for obsession with coconut farming. First experiment was a random and controlled experiment conducted with 128 students of a School of Business. It was a
22experiment with two factors viz. visual effect and awareness on cost-benefit at two levels. The aim was to understand the impact of visual photographs and awareness on cost benefit of dying coconut trees on their decision to choose alternative crop or status quo. Results prove that there is a significant relationship
between visual effect and the decision on the selection of crop in spite of clear knowledge on the cost –benefit. The second experiment was conducted with a randomly chosen 40 farmers from the region. They were asked to decide on the crop hypothetically on the basis of the situation of depleting water table. The
experiments prove that irrationality in choices is more exhibited when people are already committed with investment in line with the theory of sunk cost fallacy.