The sunk-cost fallacy in the National Basketball Association: evidence using player salary and playing time
- PDF / 655,760 Bytes
- 18 Pages / 439.37 x 666.142 pts Page_size
- 0 Downloads / 178 Views
The sunk‑cost fallacy in the National Basketball Association: evidence using player salary and playing time Alexander Hinton1 · Yiguo Sun1 Received: 29 March 2018 / Accepted: 7 February 2019 © Springer-Verlag GmbH Germany, part of Springer Nature 2019
Abstract We analyze the effect of player salary, a sunk cost, on player utilization in the National Basketball Association (NBA). According to economic theory, rational agents make decisions based on marginal expected benefits and costs, and nonrecoverable costs should not influence decision-making. Therefore, NBA teams should be playing their most productive players, regardless of salary. Whether decision-makers in the real world uphold this normative theory and ignore sunk costs has been the topic of much empirical work. Previous similar studies have looked at whether NBA teams irrationally escalate commitment to their highest drafted players by giving them more playing time than their performance warranted, coming to mixed conclusions. We build upon these studies by using salary to measure the impact of financial commitment on playing time, by using a fixed-effect panel data model to control for unobserved individual heterogeneity which may have been biasing previous results, and by using a spatial econometric model for a robust check of playing time dependence among players within each team. Our results indicate that a small but significant sunk-cost effect is found. Keywords NBA · Panel data model with fixed effects · Performance statistics · Playing time · Salary · SLX model · Sunk-cost fallacy
1 Introduction Do sunk (non-recoverable) costs matter? Economic theory tells us no. Sunk costs do not matter as once a cost is sunk it has no effect on future marginal benefits and costs and therefore plays no role in rational decision-making. While decision-makers should ignore sunk costs, the question has become whether humans in the real * Yiguo Sun [email protected] Alexander Hinton [email protected] 1
Department of Economics and Finance, University of Guelph, Guelph, ON N1G2W1, Canada
13
Vol.:(0123456789)
A. Hinton, Y. Sun
world make decisions holding to this normative theory of rational behavior/decisionmaking. Experimental work of Staw (1976, 1981), Arkes (1996), Arkes and Blumer (1985) and others demonstrated situations where sunk costs were not ignored by decision-makers, with this flaw in decision-making coming to be known as the sunkcost fallacy. There are differing explanations as to why this occurs. For instance, self-justification of the original decision (Staw 1981), not wanting to appear wasteful (Arkes 1996), or due to the framing of decisions/prospect theory (Whyte 1986). Regardless of the psychological mechanisms explaining the behavior, if sunk costs are being taken into account in economic decisions, this is a violation of economic theory. With much of the previous work demonstrating the fallacy being experimental in nature, observational studies were needed to prove it exists in the real world with experts making high-stakes decision
Data Loading...
