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|Title: ||Sunk cost accounting and entrapment in corporate acquisitions and financial markets : an experimental analysis|
|Authors: ||Kelly, Benjamin|
|Supervisors: ||Bonetti, Shane|
|Keywords: ||Experimental economics|
|Issue Date: ||Jun-2008|
|Abstract: ||Sunk cost accounting refers to the empirical finding that individuals tend to let their
decisions be influenced by costs made at an earlier time in such a way that they are
more risk seeking than they would be had they not incurred these costs. Such
behaviour violates the axioms of economic theory which states individuals should
only consider incremental costs and benefits when executing investments. This
dissertation is concerned whether the pervasive sunk cost phenomenon extends to
corporate acquisitions and financial markets. 122 students from the University of St
Andrews participated in three experiments exploring the use of sunk costs in
interactive negotiation contexts and financial markets. Experiment I elucidates that
subjects value the sunk cost issue higher than other issues in a multi-issue negotiation.
Experiment II illustrates that bidders are influenced by the sunk costs of competing
bidders in a first price, sealed-bid, common-value auction. In financial markets their
exists an analogous concept to sunk cost accounting known as the disposition effect.
This explains the tendency of investors to sell “winning” stocks and hold “losing”
stocks. Experiment III demonstrates that trading strategies in an experimental equity
market are influenced by a pre-trading brokerage cost. Not only are subjects
influenced in the direction that reduces the disposition effect but also trading is
diminished. Without the brokerage cost there was a significant disposition effect.
C70, C90, D44, D80, D81, G11|
|Publisher: ||University of St Andrews|
|Appears in Collections:||Economics & Finance Theses|
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