Investments: The Sunk-Cost Effect

Its hard to disagree that investments are a challenging process that requires special attention, careful consideration, readiness to risks and thorough analysis of the situation and its circumstances. When talking about prospects, some people are certain of their future success and are ready to invest all their money into their implementation.. Unfortunately, sometimes the results are negative, and one mistake that can lead them is the investor’s irrational attention to sunk costs during their decision-making.

To begin with, it’s essential to notice that both researchers and experimenters of the sunk cost effect tested undergraduate business students. To explore the functional relationship between the decision to continue investing in a research and development project and sunk cost, students were divided into three groups and provided with the prospect scenario. Based on the previous investments, they have decided to continue to invest the rest of the budget into the project. The first group revealed a significant and strong effect of sunk cost: as sunk cost increased, the students reported a higher likelihood of authorizing all remaining money into the project. The second group, in which the students decided to invest the next 1 million, also revealed a severe relationship with sunk cost. Finally the last group did not show any dependence on sunk costs.

According to this research blog, I explored the effects of past investments of time, and money. While the sunk cost effect is not related to past investments of time, it appears when it comes to monetary investments. People account for time and money differently, which affect their choices and decision-making.

marketing businessman person hands
Trying to decide on what to invest in is hard, but with the right advice and step-by-step approach, it can be easy as 1-2-3!

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