Impact of Cognitive Biases on Decision Making by Financial Planners: Sunk Cost, Framing and Problem Space


  •  Gregory Laing    

Abstract

The aim of this paper is to test the existence of the framing effect and sunk cost effect whilst examining the influence of cognitive factors. The approach to this research involved combing two frameworks, Prospect Theory and Image Theory, to analyse the outcomes of financial decision making from a survey of financial planners. The findings confirm the existence of the framing effect and a sunk cost effect. In particular the lowering of the amount of sunk cost produced a higher mean funding outcome than that attained in the positive frame. With regards to cognitive factors a significant correlation between perception of responsibility and the amount of funding granted was identified. This is consistent with the existence of escalation commitment behaviour, which is considered to be a manifestation of feelings of responsibility. The perception of the problem space produced an unexpected set of results. In particular both low image compatibility and high image compatibility were significant predictors of the level of funding granted.


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