Sunk Cost Fallacy in Driving the World's Costliest Cars

Teck Ho (), Ivan Png and Sadat Reza

MPRA Paper from University Library of Munich, Germany

Abstract: We develop a behavioral model of durable good usage with mental accounting for sunk costs. It predicts higher-than-rational usage that attenuates at a rate that increases with sunk costs. Singapore government policy varied the sunk cost of buying a new car. Using Singapore data, we estimate the elasticity of driving with respect to sunk costs to be 0.048, which implies that government policy between 2009 and 2013 was associated with 86 kilometers per month, or 5.6%, more driving. The results are robust to specifying sunk costs as relative to buyer income and estimation with Hong Kong data. We believe this to be the first field evidence of the sunk cost fallacy in usage of a major durable good.

Keywords: sunk costs; mental accounting; behavioral economics; durable goods; consumer choice (search for similar items in EconPapers)
JEL-codes: D4 (search for similar items in EconPapers)
Date: 2017-03-02
New Economics Papers: this item is included in nep-ind, nep-sea and nep-tre
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:82139

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