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Judgment in Managerial Decision Making 8e Chapter 7 The Escalation of Commitment
Copyright 2013 John Wiley & Sons
As noted previously, we tend to use heuristics, or rules of thumb, to reduce the complexity of our decisions.
Often, these heuristics allow us to make effective decisions in a short amount of time.
However, under the right set of circumstances they can also lead us into making biased decisions.
Avoiding the biases that come with the use of heuristics is so difficult that even the most intelligent people are prone to error.
Before introducing key biases, take a few minutes to answer the following questions. Write down your answers.
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The Escalation of Commitment
What is escalation of commitment:
the pervasive tendency to increasingly commit resources into the pursuit of an initial goal or decision, irrespective of evidence suggesting that it is best to abandon our initial goal or decision
Competition and escalation
Explanations for escalation
How to reduce it
The escalation of commitment is the pervasive tendency to increasingly commit resources into the pursuit of an initial goal or decision, irrespective of evidence suggesting that it is best to abandon our initial goal or decision.
We will first discuss the escalation of commitment in more detail.
Then, we will examine how competitive environments make people more likely to escalate their commitment to a decision.
Finally, we will discuss some of the psychological mechanisms responsible for the escalation of commitment and provide recommendations on how to reduce the tendency to escalate commitment.
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The Escalation of Commitment
In the previous chapters, we examined single decisions.
However, many critical managerial decisions concern a series of choices rather than an isolated decision.
We are prone to a particular type of bias when approaching decisions serially—namely, a tendency to escalate commitment to our initial decision
The escalation of commitment is the pervasive tendency to increasingly commit resources into the pursuit of an initial goal or decision, irrespective of evidence suggesting that it is best to abandon our initial goal or decision.
We will first discuss the escalation of commitment in more detail.
Then, we will examine how competitive environments make people more likely to escalate their commitment to a decision.
Finally, we will discuss some of the psychological mechanisms responsible for the escalation of commitment and provide recommendations on how to reduce the tendency to escalate commitment.
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Situations Inviting Escalation
Firing people that you hired, despite a track record of poor performance (in the hopes he/she will perform better and that its just the start)
Leaving a company after a lot of time invested, you may fear the loss of career advancement
Further investments in a start-up, after the initial investment
Sinking more money into a car, in the hope that each subsequent investment is the last
Staying on hold for an operator or customer rep.
Selling a low-performing stock
A wide range of situations are likely to lead to escalatory behavior. Here are some of them:
When you consider whether to fire an employee that you originally hired, you may be reluctant to give up on the employee despite a track record of poor performance.
When you decide whether to leave a company that you have invested a lot of time with, you may fear that if you leave the company, you will just miss out an opportunity for career advancement.
When you invest in a start-up company and it asks for additional funding, you may feel the need to continue funding the company despite its inability to generate returns on your initial investment.
When you have a beloved old car, you may continually invest funds into repairing the car out of hope that each subsequent investment will be the last one necessary for quite some time.
When you make a phone call to a company that puts you on hol for awhile, you may be reluctant to hang up because your chance to speak to a customer service representative may be just seconds away.
When you invest in a stock and it performs poorly, you may be reluctant to sell the stock due to the possibility that it skyrockets in value the next day.
In each of these situations, we often feel a need to continue persisting in the face of adversity out of hopes that it will lead to future payoffs.
However, we typically persist for too long in these situations despite there being an abundance of evidence that our persistence will not pay off.
Though we should ignore sunk costs, or irrevocable costs, when making subsequent decisions about a possible course of action, the evidence suggests that people become more likely to escalate their commitment after investing substantial sunk costs into a course of action.
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Situations Inviting Escalation
In each of these situations:
we have to make a decision based on a previous decision,
and we often feel a need to continue persisting in the face of adversity out of hopes that it will lead to future payoffs.
However, we typically persist for too long in these situations despite there being an abundance of evidence that our persistence will not pay off.
How do you know when to quit?
At what point does continuing on the same course of action become irrational?
And why, when such behavior becomes irrational, is it so common?
A wide range of situations are likely to lead to escalatory behavior. Here are some of them:
When you consider whether to fire an employee that you originally hired, you may be reluctant to give up on the employee despite a track record of poor performance.
When you decide whether to leave a company that you have invested a lot of time with, you may fear that if you leave the company, you will just miss out an opportunity for career advancement.
When you invest in a start-up company and it asks for additional funding, you may feel the need to continue funding the company despite its inability to generate returns on your initial investment.
When you have a beloved old car, you may continually invest funds into repairing the car out of hope that each subsequent investment will be the last one necessary for quite some time.
When you make a phone call to a company that puts you on hol for awhile, you may be reluctant to hang up because your chance to speak to a customer service representative may be just seconds away.
When you invest in a stock and it performs poorly, you may be reluctant to sell the stock due to the possibility that it skyrockets in value the next day.
In each of these situations, we often feel a need to continue persisting in the face of adversity out of hopes that it will lead to future payoffs.
However, we typically persist for too long in these situations despite there being an abundance of evidence that our persistence will not pay off.
Though we should ignore sunk costs, or irrevocable costs, when making subsequent decisions about a possible course of action, the evidence suggests that people become more likely to escalate their commitment after investing substantial sunk costs into a course of action.
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Situations Inviting Escalation
According to accountants and economists gave us insights into this problem, and that we need to calculate future value/payoff despite the sunk costs included
a Ph.D. student thinking to quite the program should not think about the time spent in the program already (6 months or 4 years) to make a decision.
Yet, trained managers suggest that this advice rarely leads to wise decisions in the real world.
Evidence suggests that people become more likely to escalate their commitment after investing substantial sunk costs into a course of action.
A wide range of situations are likely to lead to escalatory behavior. Here are some of them:
When you consider whether to fire an employee that you originally hired, you may be reluctant to give up on the employee despite a track record of poor performance.
When you decide whether to leave a company that you have invested a lot of time with, you may fear that if you leave the company, you will just miss out an opportunity for career advancement.
When you invest in a start-up company and it asks for additional funding, you may feel the need to continue funding the company despite its inability to generate returns on your initial investment.
When you have a beloved old car, you may continually invest funds into repairing the car out of hope that each subsequent investment will be the last one necessary for quite some time.
When you make a phone call to a company that puts you on hol for awhile, you may be reluctant to hang up because your chance to speak to a customer service representative may be just seconds away.
When you invest in a stock and it performs poorly, you may be reluctant to sell the stock due to the possibility that it skyrockets in value the next day.
In each of these situations, we often feel a need to continue persisting in the face of adversity out of hopes that it will lead to future payoffs.
However, we typically persist for too long in these situations despite there being an abundance of evidence that our persistence will not pay off.
Though we should ignore sunk costs, or irrevocable costs, when making subsequent decisions about a possible course of action, the evidence suggests that people become more likely to escalate their commitment after investing substantial sunk costs into a course of action.
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The Unilateral Escalation Paradigm
Factors influencing escalation
Self-justification
Staw’s experiment in allocating R&D funds
After 3 years, a news of success and failure is given
Group A made the initial decision, and group B inherited the decision
When the outcome was negative, group A allocated significantly more funds than B, while the amount was the about the same in successful outcomes
Cause of a setback
When a setback can be directly blamed on a person, they are not much more likely to continue investing additional costs following a failure than following a success.
However, when a setback can be blamed on external factors, people invest a great deal more resources into an initial decision following a failure than following a success
Several factors have been demonstrated to impact the extent to which we escalate our commitment to a prior decisions.
People often feel a need to justify their prior decisions.
When others fail, people don’t feel a need to justify their prior decisions by investing more costs into their prior decision.
However, when people are the only ones who fail, they are particularly likely to invest costs into their prior decisions following an initial failure.
The cause of a setback also plays an important role.
When a setback can be directly blamed on a person, they are not much more likely to continue investing additional costs following a failure than following a success.
However, when a setback can be blamed on external factors, people invest a great deal more resources into an initial decision following a failure than following a success.
We also know that groups and individuals have different tendencies to escalate.
Overall, groups are less likely to escalate their commitment to a course of action because with more members, it is more likely that at least one person can recognize the irrationality of continued escalation.
However, groups that do escalate commitment do so to a greater degree than individuals that escalate.
Some examples of escalation in the real-world that research has uncovered include:
Managers evaluate those that they hired in a positively biased manner.
NBA teams are more likely to give high draft picks playing time and less likely to trade them or release them than low draft picks, irrespective of actual performance.
Mountain climbers often subject themselves to unnecessary risk in the face of poor weather, especially after they have already made significant progress towards reaching the peak of a mountain.
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The Unilateral Escalation Paradigm
Factors influencing escalation
Groups versus individuals
Overall, groups are less likely to escalate their commitment to a course of action
because with more members, it is more likely that at least one person can recognize the irrationality of continued escalation.
However, groups that do escalate commitment do so to a greater degree than individuals that escalate.
Several factors have been demonstrated to impact the extent to which we escalate our commitment to a prior decisions.
People often feel a need to justify their prior decisions.
When others fail, people don’t feel a need to justify their prior decisions by investing more costs into their prior decision.
However, when people are the only ones who fail, they are particularly likely to invest costs into their prior decisions following an initial failure.
The cause of a setback also plays an important role.
When a setback can be directly blamed on a person, they are not much more likely to continue investing additional costs following a failure than following a success.
However, when a setback can be blamed on external factors, people invest a great deal more resources into an initial decision following a failure than following a success.
We also know that groups and individuals have different tendencies to escalate.
Overall, groups are less likely to escalate their commitment to a course of action because with more members, it is more likely that at least one person can recognize the irrationality of continued escalation.
However, groups that do escalate commitment do so to a greater degree than individuals that escalate.
Some examples of escalation in the real-world that research has uncovered include:
Managers evaluate those that they hired in a positively biased manner.
NBA teams are more likely to give high draft picks playing time and less likely to trade them or release them than low draft picks, irrespective of actual performance.
Mountain climbers often subject themselves to unnecessary risk in the face of poor weather, especially after they have already made significant progress towards reaching the peak of a mountain.
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The Unilateral Escalation Paradigm
Other examples of escalation
Employee evaluations and hiring managers
Managers evaluate those that they hired in a positively biased manner
While supervisors who participate in such a decision and disagree with the decision to hire/ promote bias subsequent performance appraisals negatively
NBA draft picks
NBA teams are more likely to give high draft picks playing time and less likely to trade them or release them than low draft picks, irrespective of actual performance
Several factors have been demonstrated to impact the extent to which we escalate our commitment to a prior decisions.
People often feel a need to justify their prior decisions.
When others fail, people don’t feel a need to justify their prior decisions by investing more costs into their prior decision.
However, when people are the only ones who fail, they are particularly likely to invest costs into their prior decisions following an initial failure.
The cause of a setback also plays an important role.
When a setback can be directly blamed on a person, they are not much more likely to continue investing additional costs following a failure than following a success.
However, when a setback can be blamed on external factors, people invest a great deal more resources into an initial decision following a failure than following a success.
We also know that groups and individuals have different tendencies to escalate.
Overall, groups are less likely to escalate their commitment to a course of action because with more members, it is more likely that at least one person can recognize the irrationality of continued escalation.
However, groups that do escalate commitment do so to a greater degree than individuals that escalate.
Some examples of escalation in the real-world that research has uncovered include:
Managers evaluate those that they hired in a positively biased manner.
NBA teams are more likely to give high draft picks playing time and less likely to trade them or release them than low draft picks, irrespective of actual performance.
Mountain climbers often subject themselves to unnecessary risk in the face of poor weather, especially after they have already made significant progress towards reaching the peak of a mountain.
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