The Effect of Windfall Gains on the Sunk-Cost Effect

Prior research has extensively documented the sunk-cost effect – an irrational attention to irrecoverable past costs while making pending investment or consumption decisions. In a series of experiments, we show that the sunk-cost effect weakens and sometimes disappears when consumers receive a windfall (unexpected) income at the time of making a decision. This unbudgeted income allows consumers to write off their past losses, thereby eliminating the pressure to consume in order to satisfactorily close the account. We further show that the similarity between the nature of the windfall income and the past sunk-cost moderates this relationship. More generally, we argue that mental accounts can be flexible and consumers may have discretion in moving money between different mental accounts.