Large Assignment Needed
Sunk Costs and Escalation of Commitment
MHR 538 – HR Leadership
Admin
Don’t forget about your weekly journal entries
How did the Discussion Board go?
Catching up on some more intros
2 truths, 1 lie
Light Brain Stretching…
Who claims to be the first man to relieve himself on the moon?
What planet is closest in size to Earth’s moon?
What section of the grocery store has the highest percentage of store brands?
Cogitate the following…
Suzie asked Katie, “What do you think of that new diner on the moon?” Katie replied…
Buzz Aldrin
Mercury
The Dairy Section
“It was out of this world” or
“Food was good, but there really wasn’t much atmosphere”
3
Cogitate the following…
What time are watches usually set for in ads?
10:10. Supposed to reflect a “happy, upbeat mood”.
4
Today’s Objectives…
Comprehend the basic concept of Sunk Costs and Escalation of Commitment
Understand how individuals can become locked into a course of action (what drives them)
Identify the four major determinants of commitment to a course of action
Recognize the different parts of the Model of the Commitment process
Learn ways that may help you avoid falling victim to sunk costs and/or escalation of commitment
Let’s Hold an Auction
I am auctioning off $20. Auction rules are:
Bids must be in $1 increments
Highest bidder wins the money
They pay their bid to get the money
Second highest bidder pays their last bid, but gets nothing
Escalation of Commitment to a Course of Action
So what does this really mean?
Two primary ways of explaining decisional errors
Individual limitations in information processing
Bounded Rationality
Breakdown in rationality due to interpersonal elements
Common process leading to an escalation of commitment
Decision maker has invested a great deal of time, effort and/or resources in a selected course of action (COA)
The COA has not yielded an optimal outcome
The goal that made continuing so attractive was the perceived possibility (with a typically small probability) that escalating the conflict one step further could lead to victory/success
The Lemon
Your car broke down last month and you paid to have it repaired. Now there is a new problem. Do you continue to put money into the car or buy a new car?
According to Staw, what are two key drivers of escalation of commitment?
Justification
Norms of Consistency
What are the four major determinants of commitment to a course of action?
Retrospective Rationality
1. Motivation to justify previous decisions
Modeling
2. Norms of Consistency
Prospective Rationality
3. Probability of future outcomes
4. Value of future outcomes
Call Centers
You call for information and are put on hold.
How long do you stay on hold?
How do you decide?
How does time already committed influence/change your decision?
Recommendations for avoiding falling victim to escalation of commitment
General Propositions
Shift evaluation system from defense of past actions to attainment of future gain.
Emphasize merits of experimentation versus consistency
Specific Steps
Seek and follow advice of outsiders
Not responsible for previous losses
Not subject to internal or external needs to justify past actions
Rotate/change those in charge of allocating resources
Key to making rational decisions
Being able to discriminate situations where
Persistence will pay off
vs.
Persistence will be counterproductive
Misdirected persistence can lead to wasting a great deal of time, energy and money
However, directed persistence can lead to commensurate payoffs
After all, aren’t we taught the value of the motto, ‘try, try, again’.
“If at first you don’t succeed, try, try again. Then quit. No use being a damn fool about it.” -- WC Fields
The Investment
You agree to give someone a $50,000 start up loan. One year later, the individual returns to tell you that the business is struggling and that all $50,000 will be spent soon. The individual states that under current conditions they will not be able to re-pay you.
However, the individual states, with complete confidence, that with an additional $25,000 loan the company can weather the current storm and turn things around, succeed and that they will pay you back even more than you originally agreed. Do you loan the individual another $25,000?
Be careful of the potential for these situations to creep toward ethics
The Pinto
Company rushed the Pinto through production and onto the market
Shortly after the first few cars came off the assembly line, they learned that its gas tank could get ruptured in a collision and cause a fire
What to do now?
What did Ford do?
Performed a cost-benefit analysis
Accounting employees and lawyers said it would cost less to litigate issues than to recall all of the cars and re-engineer to fix the issue.
Concepts introduced, but only briefly discussed
Subjective Expected Utility (SEU)
Hero Effect
Identify connections between Creativity and Escalation of Commitment
Great for Discussion Boards/Papers
Peeking ahead…Discuss connections between Sensemaking and Escalation of Commitment
Look for opportunities to connect lesson concepts…
Next Time…College Shirt Day (Non-Rollins Preferred)
Organizational Justice
The Management of Organizational Justice
Equity vs Equality
Arguments of Equity and Equality
Discussion Board 2 Due
Back-up Slides
Opportunity to earn some extra credit DUE NLT
Answer the following:
Considering the Army Crew Case, briefly discuss the two conditions presented by Ouchi that raise the costs of transactions between individuals. Next, briefly define and then discuss the three components of org justice (according to Cropanzano, et al.) as they relate to the case.
Identify connections between Org Learning and Escalation of Commitment
Peeking ahead…Discuss connections between Sensemaking and Escalation of Commitment
Connecting lesson concepts…
The Phone Call
You call for information and are put on hold. How long do you stay on hold?
Motorola’s Iridium Phone