Beating Irrationality: Does Delegating to IT Alleviate the Sunk Cost Effect?

Abstract

In this research, we investigate the impact of delegating decision making to information technology (IT) on an important human decision bias - the sunk cost effect. To address our research question, we use a unique and very rich dataset containing actual market transaction data for approximately 7,000 pay-per-bid auctions. Thus, unlike previous studies that are primarily laboratory experiments, we investigate the effects of using IT on the proneness to a decision bias in real market transactions. We identify and analyze irrational decision scenarios of auction participants. We find that participants with a higher monetary investment have an increased likelihood of violating the assumption of rationality, due to the sunk cost effect. Interestingly, after controlling for monetary investments, participants who delegate their decision making to IT and, consequently, have comparably lower behavioral investments (e.g., emotional attachment, effort, time) are less prone to the sunk cost effect. In particular, delegation to IT reduces the impact of overall investments on the sunk cost effect by approximately 50%.