ESCALATION AND DE-ESCALATION OF COMMITMENT IN RESPONSE TO SUNK COSTS - THE ROLE OF BUDGETING IN MENTAL ACCOUNTING

Research has traditionally assumed that people increase investment (or ''escalate commitment'') in response to previous investments (sunk co sts). This paper presents several demonstrations which show that peopl e will incorrectly de-escalate investment in response to sunk costs. I propose that people set mental budgets to control their resource expe nditures: they set a budget for a class of expenses and track their in vestments against their budget. A lab study with real monetary incenti ves shows support for de-escalation and supports a specific rule for h ow people set budgets-based on the breakeven of total costs and total benefits. The budgeting process suggests that people are only likely t o escalate commitment when they fail to set a budget or when expenses are difficult to track. The later part of the paper organizes the prev ious literature on escalation around these processes and provides addi tional experiments to illustrate each point. For example, I argue that previous demonstrations that have shown errors of escalation exclusiv ely involve ''incidental'' investments that are difficult to track. A study in the current paper shows that people are more willing to inves t time than money to salvage a monetary sunk cost and more willing to invest money than time to salvage a sunk cost of time, even when the t ime and money investments are of equal value. The paper concludes by d iscussing the rationality of escalation and de-escalation. (C) 1995 Ac ademic Press, Inc.