A Paradox of Diminishing Expectations and Increasing Value for Money

Abstract

Investments made in the form of a succession of nonrefundable cash payments, with payoff at completion and no obligation at any stage to complete, have the characteristic of becoming more attractive as more payments are made. This is on the condition that any decline in the investor's expectations occurs at a slower rate than the reduction between installments in the cost-to-complete. Decision makers involved in such investments have rational grounds for completion despite their possibly much diminished expectations. Interestingly, however, the reasons for completion cited by students in informal surveys have more generally to do with the cost already incurred and liable to be “wasted” than the cost remaining to completion. This is further evidence of the so-called “sunk cost effect.”