commitment-bias

Commitment Bias And Why It Matters In Business

Commitment bias describes the tendency of an individual to remain committed to past behaviors – even if they result in undesirable outcomes. The bias is particularly pronounced when such behaviors are performed publicly. Commitment bias is also known as escalation of commitment.

Understanding commitment bias

In business, this may be exemplified by the continued investment of time or money into a project that is clearly going to fail. Indeed, the failure of the project is often painfully obvious to outsiders and they see any attempt to save it as fruitless.

Commitment bias argues that the number of resources invested in a failing project is proportional to how much time, money, or energy has already been spent. This somewhat irrational behavior is caused by an inability to accept or acknowledge failure.

But what causes commitment bias? There are several theories:

  1. A desire for people to be judged positively by others. Many want to avoid being judged by others as an incompetent individual who makes poor choices. This is also known as saving face.
  2. Sunk-cost fallacy. When giving up on a project is seen as a waste of already invested resources, some individuals try to revive a failing project to see a return on investment. In other words, the legitimacy or potential of the project itself is ignored.
  3. Perceptions and emotional attachment. Those closest to a project – commonly those with the most invested – are sometimes so close that they develop tunnel vision. A perceived emotional connection to a project causes them to devalue alternative projects or courses of action.

Common examples of commitment bias

Although commitment bias is traditionally associated with failing projects, it can also be seen in scenarios such as:

  • Poor investment decisions. Investors may continue to hold a depreciating stock if the capital invested makes up a large percentage of their portfolio. Worse still, they may continue to invest in the stock in a vain attempt to justify their original decision.
  • Remaining in an unsuitable job. An employee occupying a role they dislike is less likely to resign if the job was hard to land. They may also view resignation as a waste of a degree or other skills and experience.
  • Bidding wars. Businesses can become irrational and spend vast amounts of money at auction for the simple reason of not wanting their bidding effort to go to waste. After a 10-week bidding war to acquire the parent company of department store Bloomingdale’s, Robert Campeau became victor after a bid of $6.58 billion. But driven by irrational behavior and a win-at-all-costs mentality, the grossly excessive bid caused Campeau to declare bankruptcy soon after.

Key takeaways

  • Commitment bias is a tendency for individuals or businesses to remain committed to past behavior, particularly if that behavior is displayed publicly.
  • The degree of commitment bias is proportional to the amount of time, energy, or money invested. It is caused by the need the feel validated by others and the sunk-cost fallacy. Emotional attachment to project outcomes is also a major contributing factor.
  • Commitment bias causes poor investment decisions and results in employees remaining in unsatisfactory positions. The irrational behavior that exemplifies commitment has also been seen in takeover bidding wars.

Connected Business Concepts

Heuristics

heuristic
As highlighted by German psychologist Gerd Gigerenzer in the paper “Heuristic Decision Making,” the term heuristic is of Greek origin, meaning “serving to find out or discover.” More precisely, a heuristic is a fast and accurate way to make decisions in the real world, which is driven by uncertainty.

Bounded Rationality

bounded-rationality
Bounded rationality is a concept attributed to Herbert Simon, an economist and political scientist interested in decision-making and how we make decisions in the real world. In fact, he believed that rather than optimizing (which was the mainstream view in the past decades) humans follow what he called satisficing.

Second-Order Thinking

second-order-thinking
Second-order thinking is a means of assessing the implications of our decisions by considering future consequences. Second-order thinking is a mental model that considers all future possibilities. It encourages individuals to think outside of the box so that they can prepare for every and eventuality. It also discourages the tendency for individuals to default to the most obvious choice.

Lateral Thinking

lateral-thinking
Lateral thinking is a business strategy that involves approaching a problem from a different direction. The strategy attempts to remove traditionally formulaic and routine approaches to problem-solving by advocating creative thinking, therefore finding unconventional ways to solve a known problem. This sort of non-linear approach to problem-solving, can at times, create a big impact.

Moonshot Thinking

moonshot-thinking
Moonshot thinking is an approach to innovation, and it can be applied to business or any other discipline where you target at least 10X goals. That shifts the mindset, and it empowers a team of people to look for unconventional solutions, thus starting from first principles, by leveraging on fast-paced experimentation.

Biases

biases
The concept of cognitive biases was introduced and popularized by the work of Amos Tversky and Daniel Kahneman in 1972. Biases are seen as systematic errors and flaws that make humans deviate from the standards of rationality, thus making us inept at making good decisions under uncertainty.

Dunning-Kruger Effect

dunning-kruger-effect
The Dunning-Kruger effect describes a cognitive bias where people with low ability in a task overestimate their ability to perform that task well. Consumers or businesses that do not possess the requisite knowledge make bad decisions. What’s more, knowledge gaps prevent the person or business from seeing their mistakes.

Occam’s Razor

occams-razor
Occam’s Razor states that one should not increase (beyond reason) the number of entities required to explain anything. All things being equal, the simplest solution is often the best one. The principle is attributed to 14th-century English theologian William of Ockham.

Mandela Effect

mandela-effect
The Mandela effect is a phenomenon where a large group of people remembers an event differently from how it occurred. The Mandela effect was first described in relation to Fiona Broome, who believed that former South African President Nelson Mandela died in prison during the 1980s. While Mandela was released from prison in 1990 and died 23 years later, Broome remembered news coverage of his death in prison and even a speech from his widow. Of course, neither event occurred in reality. But Broome was later to discover that she was not the only one with the same recollection of events.

Crowding-Out Effect

crowding-out-effect
The crowding-out effect occurs when public sector spending reduces spending in the private sector.

Bandwagon Effect

bandwagon-effect
The bandwagon effect tells us that the more a belief or idea has been adopted by more people within a group, the more the individual adoption of that idea might increase within the same group. This is the psychological effect that leads to herd mentality. What is marketing can be associated with social proof.

Read Next: BiasesBounded RationalityMandela EffectDunning-Kruger

Read Next: Bounded RationalityHeuristicsBiases.

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