Cost Stickiness and Behavioral Economics in Financial Decision-Making

Cost stickiness describes the tendency of certain costs to decrease more slowly when business activity declines than they increase when activity rises. Behavioural economics offers a framework for understanding the cognitive and motivational forces—such as loss aversion, overconfidence and anchoring—that underlie this asymmetric adjustment. Managers often retain resources in downturns to avoid the perceived regret and rebuilding costs associated with future upturns, leading to persistent overheads and discretionary expenditures even as revenues fall. Empirical studies across manufacturing, services, finance and e-commerce demonstrate that sticky costs can erode profitability, inflate financing expenses and depress firm valuation, especially under high information asymmetry. Integrating behavioural insights with econometric and experimental methods has revealed how managerial expectations, institutional norms and governance structures interact to shape cost decisions. Practical applications range from designing incentive systems that discourage excessive cost rigidity to refining audit and budgeting procedures for more responsive expense management. As this interdisciplinary field matures, global comparisons and natural experiments continue to inform both academic theory and the practice of strategic cost management in volatile markets.

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Cost Stickiness and Behavioral Economics in Financial Decision-Making publication trend

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Technical terms

Cost stickiness: The asymmetric behaviour whereby costs fall more slowly during activity declines than they rise during activity increases.

Overconfidence bias: A cognitive bias leading decision-makers to overestimate their own predictive abilities, often sustaining expenditures despite adverse signals.

Information asymmetry: A condition in which managers possess more relevant information than investors or other stakeholders, affecting perceptions of risk and cost adjustments.

References

1. An empirical analysis of gender differences in asymmetric labor adjustment: evidence from Korea. Review of Accounting Studies (2024).
2. Cost stickiness and firm value. Journal of Management Control (2023).
3. Managerial Overconfidence and Cost Behavior of R&D Expenditures. Sustainability (2019).
4. Cost behavior in e-commerce firms. Electronic Commerce Research (2022).