Premature De-escalation of Commitment in Response to Failed Investment: A Test of Theories of Escalating Commitment, Marginal Decision-Making, and Mental Budgeting

Using sophisticated subjects in an environment that should make the norms of economic behavior highly salient (MBAs in a corporate finance class), we test three theories about how people respond to previous investments: escalating commitment, mental budgeting, and marginal decision making. The results support mental budgeting.