The Recognition of the Asymmetry: Sticky Costs and Cognitive Biases

Abstract

This paper investigates whether individuals are accurate in recognizing and predicting cost stickiness under different presentation formats. In particular, I conduct an experiment manipulating the degree of cost asymmetry (nonsticky, semisticky, sticky), which is the cost behavior when revenues increase or decrease, and the presentation of financial information (monetary amounts vs. percentages). Contrary to the expectation, participants are more likely to recognize and predict accurately sticky costs rather than nonsticky costs ( i.e. cost symmetry). They mentally apply a sticky model also to predict changes of nonsticky costs. Moreover, the presentation of variations expressed as percentages allows more accurate forecasts. Further, a significant interaction effect between the two manipulations is found. The cognitive ability and the cognitive style of the participants are measured in order to disentangle possible confounding effects. The findings of this study suggest that the mental models of the individuals and their cognitive biases influence cost forecasts and adjustments decisions.