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The sunk-cost fallacy in the National Basketball Association: evidence using player salary and playing time

Abstract

We analyze the effect of player salary, a sunk cost, on player utilization in the National Basketball Association (NBA). According to economic theory, rational agents make decisions based on marginal expected benefits and costs, and non-recoverable costs should not influence decision-making. Therefore, NBA teams should be playing their most productive players, regardless of salary. Whether decision-makers in the real world uphold this normative theory and ignore sunk costs has been the topic of much empirical work. Previous similar studies have looked at whether NBA teams irrationally escalate commitment to their highest drafted players by giving them more playing time than their performance warranted, coming to mixed conclusions. We build upon these studies by using salary to measure the impact of financial commitment on playing time, by using a fixed-effect panel data model to control for unobserved individual heterogeneity which may have been biasing previous results, and by using a spatial econometric model for a robust check of playing time dependence among players within each team. Our results indicate that a small but significant sunk-cost effect is found.

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Notes

  1. The highlights of the NBA collective Bargaining agreement are described in http://www.nba.com/media/CBA101.pdf.

  2. For more on win shares, see Basketball-reference (https://www.basketball-reference.com/about/ws.html).

  3. Once a player has incurred their 6th foul during a game, they have “fouled-out” and are no longer able to play during that game.

  4. We thank one of the referees to pointing out this issue.

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Acknowledgements

We would like to thank two anonymous referees and the associated editor for their comments. Yiguo Sun would like to thank the financial support by the Social Science and Humanities Research Council of Canada Insightful Grant 435-2016-0340.

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Correspondence to Yiguo Sun.

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Hinton, A., Sun, Y. The sunk-cost fallacy in the National Basketball Association: evidence using player salary and playing time. Empir Econ 59, 1019–1036 (2020). https://doi.org/10.1007/s00181-019-01641-4

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Keywords

  • NBA
  • Panel data model with fixed effects
  • Performance statistics
  • Playing time
  • Salary
  • SLX model
  • Sunk-cost fallacy