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Abstract
The sunk-cost effect is widely discussed in different research settings, while the behavioral mechanism underlying this phenomenon remains elusive. In this paper, I investigate the behavioral dynamics of the sunk-cost effect through a two-stage investment task in a laboratory setting. The experiment reveals that subjects exhibit a robust pro-rata fallacy (reverse sunk-cost fallacy): subjects are less likely to make additional investments in the presence of exogenous sunk costs. This fallacy is absent when subjects are not accountable for their initial investment decisions. Contrary to expectations, sunk costs do not distort subjects’ beliefs about future project success. These results suggest that the classic sunk-cost fallacy may be contingent on the endogeneity of initial investment, with the pro-rata fallacy emerging due to psychological factors that avoid acknowledging past mistakes or unfavorable outcomes.