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

TL;DR

This study examines whether delegating decision-making to IT reduces the sunk cost effect in real market auctions, finding that IT delegation can significantly mitigate irrational investment behaviors.

Contribution

It provides empirical evidence from real market data that IT delegation decreases susceptibility to the sunk cost effect, a novel insight beyond laboratory experiments.

Findings

IT delegation reduces sunk cost effect by approximately 50%

Higher monetary investments increase irrationality in decision-making

Delegation to IT lowers behavioral investments like emotional attachment

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%.