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Volume :2 Issue : 2 1995
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The Effect of Information Asymmetry and the Size of Sunk Cost on Escalation Errors: Experimental Evidence
Auther : Mohamed El-Said Abul-Ezz
Recently, an economic theory-based interpretation escalation errors in terms of the reputation effect predicts a positive relationship between the size of sunk cost and the propensity to escalate. Ninety managers were randomly assigned to four experimental conditions resulting from crossing two sunk cost levels (high, low) with two information levels (private, public). They were asked to indicate whether they would continue or discontinue each of three failing investments. The results of the MANOVA suggest greater propensity to commit escalation errors: (a) when the manger’s disconfirming information is private and (b) when sunk cost is high. Discussion, limitations and implications of the results are presented.