Are Sunk Costs Irrelevant? Evidence From Playing Time in the National Basketball Association

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. www.econstor.eu The relevance of sunk costs in decision making is one of the major sources of disagreement between neoclassical economists and behavioral economists. We test the importance of sunk costs by examining the role of a player's draft position on his playing time in the National Basketball Association. Specifically, we ask whether players taken as "lottery picks" or in the first round of the draft are treated differently from otherwise identical players who are chosen later. We build on previous studies in three ways. First, we study a time period that had a stronger contrast between the financial commitment to first and second-round draft picks. Second, we use a better measure of playing time by accounting fully for the time a player loses to injury, suspension, or other exogenous factor. Finally and most importantly, we use a more sophisticated methodology -regression discontinuity -to test for whether teams treat lottery picks or first-round picks differently from later picks. Our results find little or no impact of draft round or lottery status on playing time. Hence, our findings strongly support the neoclassical outlook. Terms of use: Documents in D I S C U S S I O N P A P E R S E R I E S NON-TECHNICAL SUMMARYWe test whether people respond to sunk costs by asking whether NBA teams give more playing time to "lottery picks" and first-round picks -players to whom they have made a greater financial commitment -than to otherwise identical players who were selected later in the draft.JEL Classification: D03, J23, L83

The Sunk-Cost Fallacy in the National Football League

“…The results differ from recent research using the NBA, which suggests sunk costs are irrelevant in playing time decisions (Leeds et al, 2015). The different results may point to an important factor about the sunk-cost fallacy.…”

“…The LATE can be consistently estimated using the two-stage least squares (2SLS; Imbens & Lemieux, 2008; Lee & Lemieux, 2010; van der Klaauw, 2002). The initial method is to use pooled cubic regression (Imbens & Lemieux, 2008; Keefer, 2014; Lee & Lemieux, 2010; Leeds et al, 2015; van der Klaauw, 2002). …”

“…Observational studies of the sunk-cost fallacy have focused on professional sports, specifically the National Basketball Association (NBA; Camerer & Weber, 1999; Leeds, Leeds, & Motomura, 2015; Staw & Hoang, 1995). Professional sports provide a unique opportunity to study the sunk-cost fallacy as there is an abundance of consistently recorded data on employees, managers, and owners and the stakes are very high.…”

“…We consider financial commitment to rookie players as a sunk cost. We analyze the first two rounds of the NFL draft, using a similar method to Leeds et al (2015). Evaluation of the sunk-cost fallacy in the NFL draft is important for two major reasons.…”

Dancing with the stars: Benefits of a star employee’s temporary absence for organizational performance

“…We obtained injury data for NBA players from Pro Sports Transactions (http://www. prosportstransactions.com), which has been used in prior research to identify player injuries in the NBA (Begly, Guss, Ramme, Karia, & Meislin, 2016;Guss et al, 2016;Leeds, Leeds, & Motomura, 2015). The data are comprehensive in listing the date a player was injured but less comprehensive in listing the date a player recovered from injury.…”