The Sunk Cost Fallacy in Reverse Auctions

We empirically study buyer behavior in an online outsourcing website where sealed bid auctions are held with bids arriving over time. We focus on when buyers terminate their requests and how they behave when choosing the winning bid. We find that buyers are more likely to choose the last bid; and all other positions (i.e., the first bid, the second bid, until the penultimate bid) are chosen with approximately the same frequency. We provide a simple probabilistic model that captures this behavior. The key characteristic of this model is that buyers are more likely to stop when the most recent bid is the best so far. This feature is related to the sunk cost fallacy: once a buyer has waited for some time, she has an escalating tendency to continue waiting until a bid that is better than all prior bids arrives. A buyer is unwilling to recall early bids, because that would make her perceive the time since the arrival of early bids as “wasted”, even though the time cost has already been incurred at the time of the decision.