A Study on the Difference between Investment Decisions by Experienced Investors and Inexperienced Investors: A Focus on the Sunk Cost Effect

다국어 초록 (Multilingual Abstract)

The sunk cost effect is defined as the tendency in which investors continue to try their time, money and efforts that were invested in the past. According to existing studies, sunk costs, still in many cases, appear to have a strong influence on future investment decision making even though they are not to be taken into consideration by reasonable decision makers because they are investment costs of the past that cannot be changed by present or future decision making.
On the other hand, internal information accumulated in the market such as “the amount of personal experience and information about a certain product or service" is called consumer knowledge. There have been many studies that show that consumer knowledge influences the way consumers process their information. It appears to be not only an information search for product evaluation, but also the attitude-behavior relationship that is under the influence of consumer knowledge. That is, experts who have a lot of experience buying and using the products and are skillful at dealing with them appear to have a lot of objective knowledge about the attributes and the brands of the products, constituting a high level of prototypes of the products. Experts, therefore, ignore information that they don’t want or is unnecessary for them and make a selective search for information that is related to them, using information that they know about the products first, when they process their product information. In addition, they are able to make a spontaneous evaluation of the products, making use of information they have already, and can make a much faster decision on the evaluation of information than novices. As a result, experts use comparatively less cognitive resources than novices when they evaluate product information.
According to existing studies, the more the investment repeats, the bigger the tendency to avoid a failed investment becomes, so that it can be said that the more investment experience they have, the less their sunk cost becomes. This study, therefore, investigates what influence sunk costs can have on the decision making between experienced investors and inexperienced investors, an extension of the results of existing studies. To this end, face-to-face questionnaire interviews were conducted. Interviewees who were VIP customers of financial institutions were regarded as experienced investors, while interviewees who were university students were regarded as inexperienced investors. The findings are as follows. First, inexperienced investors appeared to take sunk cost into consideration more than experienced investors do when they make investment decisions. But still the rate of those who think it is necessary to take sunk cost into consideration among the experienced investors was as high as 69%, so sunk cost appeared to have a strong influence on their investment decision making. Second, when it comes to actual investment decision making, sunk cost appeared to have more influence on inexperienced investors than on experienced investors. These findings show that experienced investors make comparatively more reasonable investment decisions than inexperienced investors do.

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