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ECA5101 Presentation:
Do people drive more because they paid
their cars??
Literature Review on Sunk ost Fallacy
the Worlds ostliest ars
Presented by:Fan YiJun
Cao WanZhong
Zhou BaiQi
Jonathan Chan
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Presentation Outline
Introduction to:Economy Theory
& Singapores Car Policy
YiJun
Main Findings
& Model Specification
WanZhong
Empirical Design,Econometrics Interpretation,
Alternative explanation
BaiQi
Robustness testing
Policy Implications
& Opinion on paper
Jonathan
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Introduction to underlying econom
Key Microeconomic Concept:
Sunk Cost Fallacy: To continue doing something if substantial amoueffort have already been invested, even when continuing is not the best th
Appropriate setting to test theory?
Buying a car is a big ticket item in Singapore, where there is substantiapurchase prices over time due to COE policies
2 Possible effects of higher sunk cost:
More effort invested to correct irrational bias
Irrational bias still exist (Proven in this paper)
Introduction to:Economy Theory
& Singapores Car Policy
Main Findings
& Model Specification
Empirical Design,
Econometrics Interpretation
& Alternative explanation
Robustness testing
Policy Implications
& Opinion on paper
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Introduction to Singapores ar
= 1
OMV, Open Market Value: Import price of a car, may flumanufacturers pricing strategy
ARF, Additional Registration Fee: Fee for new car registra100% of OMW
Therefore ARF=f(OMV)
COE, Certificate of Entitlement AKA Quota Premium:
Right to own a car for 10 years from day of purchase
cannot be detached from original car of registration
Floating price is determined by a bi-monthly auction
Supply is fixed by a monthly quota based on:
i.Specific growth rate of car population
ii.Number of de-registration in preceding time period
Main cause of variations of car retail prices
Introduction to:Economy Theory
& Singapores Car Policy
Main Findings
& Model Specification
Empirical Design,
Econometrics Interpretation
& Alternative explanation
Robustness testing
Policy Implications
& Opinion on paper
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Introduction to Singapores ar
Introduction to:Economy Theory
& Singapores Car Policy
Main Findings
& Model Specification
Empirical Design,
Econometrics Interpretation
& Alternative explanation
Robustness testing
Policy Implications
& Opinion on paper
Note the large swings in COE prices, highly volatile
Rapid over the years due to quotasreleased coupled with
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Introduction to Singapores ar
Introduction to:Economy Theory
& Singapores Car Policy
Main Findings
& Model Specification
Empirical Design,
Econometrics Interpretation
& Alternative explanation
Robustness testing
Policy Implications
& Opinion on paper
Note the immediate 20% in COE value the moment the new car owner
Linear of 8% yearly for the next 10 years
0 1 2 3 4 5 6 7 8
% COE Remaining 80% 72% 64% 56% 48% 40% 32% 24% 16
0%
10%20%
30%
40%
50%
60%
70%
80%
90%
100% % COE Value remaining after x no of years
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Introduction to Singapores ar
Introduction to:Economy Theory
& Singapores Car Policy
Main Findings
& Model Specification
Empirical Design,
Econometrics Interpretation
& Alternative explanation
Robustness testing
Policy Implications
& Opinion on paper
Note the immediate 25% in ARF value the moment the new car iowner
No further decline for the 1st 5 years, after which there is a step-down
1 2 3 4 5 6 7 8
% ARF Remaining 75% 75% 75% 75% 75% 60% 45% 30% 1
0%
10%
20%
30%
40%
50%
60%70%
80%
90%
100%% ARF Value remaining after x no of years
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Main Findings
Proposition 1: Sunk CostUsage:
Notice the correlation between Policy-related Sunk Cost & Average mo
Robust evidence of sunk cost fallacy (Irrational Behaviour)
1
st
4 years: S$1,000sunk cost
142.666km annual usage (3.4%
Introduction to:Economy Theory
& Singapores Car Policy
Main Findings
& Model Specification
Empirical Design,
Econometrics Interpretation
& Alternative explanation
Robustness testing
Policy Implications
& Opinion on paper
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Main Findings
Proposition 2: Attenuation
Age of carsunk cost
> Sunk Cost
> (Rate of Sunk Cost over time)
Introduction to:Economy Theory
& Singapores Car Policy
Main Findings
& Model Specification
Empirical Design,
Econometrics Interpretation
& Alternative explanation
Robustness testing
Policy Implications
& Opinion on paper
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Model Specification
2 Proposed Behaviour Models:
Conventionally Rational Behaviour
Mental Accounting for Sunk Cost
Introduction to:Economy Theory
& Singapores Car Policy
Main Findings
& Model Specification
Empirical Design,
Econometrics Interpretation
& Alternative explanation
Robustness testing
Policy Implications
& Opinion on paper
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Model Specification
Conventionally Rational Behaviour (CRB):
, = (, ) (, )
, = f (Novelty, breakdown frequency)
, = ( / , / )
= ( +++
Find Optimal usage by maximising utility
Introduction to:Economy Theory
& Singapores Car Policy
Main Findings
& Model Specification
Empirical Design,
Econometrics Interpretation
& Alternative explanation
Robustness testing
Policy Implications
& Opinion on paper
*
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Model Specification
Mental accounting for sunk cost (MASC): , | = , Sunk Cost A , | > = ,
Where Sunk Cost(SC) Adjustment
= 0 SC sensitivity factor 1
Introduction to:Economy Theory
& Singapores Car Policy
Main Findings
& Model Specification
Empirical Design,
Econometrics Interpretation
& Alternative explanation
Robustness testing
Policy Implications
& Opinion on paper
8/11/2019 Sunk Cost Fallacy
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Model Specification
Mental accounting for sunk cost (MASC):
, | = , SunkCostA
Find Optimal usage by maximising utility
Introduction to:Economy Theory
& Singapores Car Policy
Main Findings
& Model Specification
Empirical Design,
Econometrics Interpretation
& Alternative explanation
Robustness testing
Policy Implications
& Opinion on paper
inoptimal usagedue Sun
*
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Model Specification
=
= [0.2 0.25 ] [ 1
Introduction to:Economy Theory
& Singapores Car Policy
Main Findings
& Model Specification
Empirical Design,
Econometrics Interpretation
& Alternative explanation
Robustness testing
Policy Implications
& Opinion on paper
Policy-related Sunk Cost Parameters from Jun 2001-May 2009:
Mean: S$16,364
Standard Deviation: S$3400
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Empirical Design
Data Sources:
Car Retail price & Usage: Car servicing records from a authorised dealer for middle class brand of cars in Singapo
Monthly OMW, ARF, Retail Price & COE: Land TranspoSingapore
Fuel Cost:Consumer Price Index (CPI) of 98 Octane Petrol
Key features of sample set:
Panel data
Exclusion of resold cars
Exclusion of outliers (> 2 Standard Deviations of average m
Introduction to:
Economy Theory
& Singapores Car Policy
Main Findings
& Model Specification
Empirical Design,
Econometrics Interpretation
& Alternative explanation
Robustness testing
Policy Implications
& Opinion on paper
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Econometrics Interpretatio
Proposition 1: Sunk CostUsage:
OLS Regression with Robust Standard Errors:
= 2.395 0.013 1.674 0.00
(2.362) (0.009) (0.068***) (0.00 = 0.541
= Cumulative usage
= Price (S$000)= Age in months
*** Level of significant effort: p
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Econometrics Interpretatio
Proposition 1: Sunk CostUsage:
Re-specified OLS Regression with Robust Standard Errors:
= 8.549 1.409 0.001 1.775
(2.153***) (0.169***) (0.121) (0.071*** = 0.545
= Cumulative usage
= Sunk Cost Proportion of COE Premium
= Sunk Cost Proportion of ARF
= Age in months
*** Level of significant effort: p
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Econometrics Interpretatio
Proposition 2: Attenuation
Age ofcarsunk cost
> Sunk Cost > (Rate of Sunk Cost over time)
Mental amortizing sunk cost relative to some target cumulativ
Introduction to:
Economy Theory
& Singapores Car Policy
Main Findings
& Model Specification
Empirical Design,
Econometrics Interpretation
& Alternative explanation
Robustness testing
Policy Implications
& Opinion on paper
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Econometrics Interpretatio
Proposition 2: Attenuation
i) Maximum Simulated Likelihood(MSL) of Mental Accoun(MASC) model:
Introduction to:
Economy Theory
& Singapores Car Policy
Main Findings
& Model Specification
Empirical Design,
Econometrics Interpretation
& Alternative explanation
Robustness testing
Policy Implications
& Opinion on paper
Notice how all the Sunk Costs,
horizons are +ve & significantly
Consistent with Attenuation
*4 Year Horizon preferred as it h
likelihood value of -20736.6, ind
the 3 time horizons
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Econometrics Interpretatio
Introduction to:
Economy Theory
& Singapores Car Policy
Main Findings
& Model Specification
Empirical Design,
Econometrics Interpretation
& Alternative explanation
Robustness testing
Policy Implications
& Opinion on paper
i) Maximum Likelihood Estimate(MLE) of Conventionally R(CRB) model:
*
Can reject the Conventionally Rational Beh
favour of the 4 year horizon specific model a
Likelihood with more variable coefficients
from 0, hence yielding a better fit.
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Alternative Explanation
Bias Selection:
Higher prices (Higher sunk cost) would be more likely to attare planning to drive more.
Shown that there is correlation between prices and usageIntroduction to:
Economy Theory
& Singapores Car Policy
Main Findings
& Model Specification
Empirical Design,
Econometrics Interpretation
& Alternative explanation
Robustness testing
Policy Implications
& Opinion on paper
Pay more Sunk Cost Drive
Mental Accounting of Sunk Cost (MASC)
Bias Selection
Establishing Causation
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Alternative Explanation
Why Bias Selection cannot hold:
If the people who were planning to drive more were thhigher sunk cost, then there should not be attenuation
usage should remain constant in accordance with their initIntroduction to:
Economy Theory
& Singapores Car Policy
Main Findings
& Model Specification
Empirical Design,
Econometrics Interpretation
& Alternative explanation
Robustness testing
Policy Implications
& Opinion on paper
Pay more Sunk Cost Drive
Mental Accounting of Sunk Cost (MASC)
Bias Selection
Establishing Causation
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Robustness Testing
Check the sensitivity of initial model by running multiple MSL model vaother factors (Car Size, Sunk Cost as % of retail price, COE Salience, Hetero
Benchmark model is the 4 Year Time Horizon MSL equation as specified on
Notice how the Sunk Cost Elasticity of Usage stays relatively constant
=
%
% Where = Sunk Cost sensitivity fa
Introduction to:
Economy Theory
& Singapores Car Policy
Main Findings
& Model Specification
Empirical Design,
Econometrics Interpretation
& Alternative explanation
Robustness testing
Policy Implications
& Opinion on paper
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Policy Implication
COE & ARF were introduced to control the Singapore Car p
& Cost
(-1.96 Million Km/ M
Contradictory effect as highlighted by paper:
& Cost
(+0.14 Million Km/Month)
Effectiveness of Policy:
Net -1.82 Million km/ Month of Total Road UsageHighly effective still (~
Introduction to:
Economy Theory
& Singapores Car Policy
Main Findings
& Model Specification
Empirical Design,
Econometrics Interpretation
& Alternative explanation
Robustness testing
Policy Implications
& Opinion on paper
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Policy Implication Beyond C
Pricing strategy of durable goods:
Common practice: cheap durables, expensive complementary con
usage of durable good hence purchase complementary consu
Implication of sunk cost fallacy: expensive durables, cheaper coconsumables
usage of durable good hence purchase complementary consu
Introduction to:
Economy Theory
& Singapores Car Policy
Main Findings
& Model Specification
Empirical Design,
Econometrics Interpretation
& Alternative explanation
Robustness testing
Policy Implications
& Opinion on paper
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Policy Implication Beyond C
Escalationofcommitmentto rationalise the decision-makersearlier inv
Introduction to:
Economy Theory
& Singapores Car Policy
Main Findings
& Model Specification
Empirical Design,
Econometrics Interpretation
& Alternative explanation
Robustness testing
Policy Implications
& Opinion on paper
Gambling
Further gambling to
War Casualties/ resources spent
Commitment even
with no successful outcome foreseen
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Opinions on paper?
Extensively comprehensive with ample Robustngiven the data constraints:
Exclusion of 2nd hand cars Income Selection bias with poor exclu
Study can be further expanded on in the future if the relavailable:
Different brands of cars
Separation of discretionary & non-discretionary usage
Income of owner:
Sunk cost sensitivity may vary across income levels
Income Effect: SunkcostDiscretionary Incomefuels
Introduction to:
Economy Theory& Singapores Car Policy
Main Findings
& Model Specification
Empirical Design,
Econometrics Interpretation
& Alternative explanation
Robustness testing
Policy Implications
& Opinion on paper
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The EndThank you for your attention.
Questions?
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