Sunk cost fallacy : an experimental study on the effects of casino levy on gambling behaviour

• Main Authors: Hoe, Zixiang, Kesavan, Thavachelvan, Yap, Zu Hui
• Other Authors: School of Humanities and Social Sciences
• Format: Final Year Project
• Language: English
• Published: 2012
• Subjects: DRNTU::Social sciences::Economic theory
• Online Access: http://hdl.handle.net/10356/48228
• Institution: Nanyang Technological University

The Singapore government lifted the casino ban on 18th April 2005 and allowed the building of two casinos in the form of integrated resorts to attract tourism dollars to the nation state. The casino levy was used as a measure to impose a cost on local residents such that they would not frequent the casinos so as to mitigate the potential problems that could be brought about from the casinos. This research seeks to understand the impact of such a levy on gambling behaviour and to examine if there is a risk of the levy making gamblers fall into the "sunk cost fallacy" by conducting an experiment. Sunk cost would be the levy paid by gamblers entering the casinos. Should the sunk cost fallacy be prevalent among those who paid the levy, then the government would have to deal with a set of problems that defies the levy's intent. The problems that could arise are that individuals increasing their risk attitude when gambling or playing more games in the casino, in a bid to earn back the sunk cost paid. The possibility of having adverse selection where there are proportionally more high risk individuals entering the casino after the introduction of a levy is also explored. The researchers could not find sufficient evidence in a cross sectional analysis to show that the levy has brought about the sunk cost effect that causes gamblers to exhibit characteristics of a problem gambler. However, on a per round basis, the impact of a levy on bet choice is significant. This provides new insights into how people behave while gambling such that certain psychological factors might cause gambling behaviour to change over time and the possibility of smoothing risk over time. The researchers also could not find sufficient evidence regarding the presence of adverse selection in the case of implementing a levy. Keywords: sunk cost fallacy, casino, Singapore, psychological effects, bet choice, levy, problem gambling, adverse selection, loss aversion, risk smoothing