escalation-of-commitment

Escalation of Commitment

Business / By / November 22, 2023

The Escalation of Commitment is a decision-making phenomenon where individuals persist with failing courses of action due to prior investment and attempt to justify it. This behavior can lead to suboptimal outcomes as individuals avoid losses rather than seeking more rational alternatives. Examples include businesses continuing unprofitable projects and individuals remaining in failing relationships.

Introduction to Escalation of Commitment

Escalation of commitment is a behavioral phenomenon in which individuals persist in a failing course of action due to their prior investments of time, money, effort, or resources. This concept is closely related to the idea of the sunk cost fallacy, which is the tendency to consider past costs that cannot be recovered when making decisions about future actions. In essence, individuals continue investing in something not because it makes sense from a rational standpoint, but because they don’t want to waste what they’ve already invested, even if it’s clear that further investment is unwise.

The origins of the term “escalation of commitment” can be traced to the work of Barry M. Staw, a psychologist who conducted influential research on this phenomenon in the late 1970s. Staw’s experiments explored how individuals react when confronted with evidence that a chosen course of action is failing, and how they often respond by increasing their commitment rather than cutting their losses.

Psychological Mechanisms

Several psychological mechanisms underlie the escalation of commitment:

  1. Loss Aversion: Human beings have a natural aversion to losses, often valuing the avoidance of loss more than the acquisition of equivalent gains. In the context of escalation of commitment, the perceived loss of prior investments can drive individuals to continue investing more resources in the hope of avoiding those losses.
  2. Confirmation Bias: People tend to seek out and interpret information in a way that confirms their pre-existing beliefs and decisions. When individuals have committed to a particular course of action, they may actively seek evidence that supports their decision and ignore or downplay contrary information.
  3. Self-Justification: Escalating commitment can also be driven by the need for individuals to justify their initial decision. Admitting that a choice was wrong can be psychologically challenging, leading people to persist in their chosen path to avoid admitting failure.
  4. Social Pressures: Social and organizational factors can contribute to escalation of commitment. Individuals may feel pressure to maintain their commitment to a project or decision due to the expectations and opinions of peers, superiors, or stakeholders.

Real-World Examples

Escalation of commitment can be observed in a wide range of real-world situations:

  1. Business Investments: A business leader might continue to invest in a failing project, such as a new product or venture, because significant resources have already been allocated, even when it becomes clear that the project is not viable.
  2. Personal Relationships: In personal relationships, individuals may continue to invest time and effort in a failing relationship because they have already committed significant emotional energy or resources.
  3. Gambling: Gamblers who have lost money at a casino may continue to gamble in an attempt to recoup their losses, despite mounting evidence that they are unlikely to succeed.
  4. Education: Students may persist in pursuing a degree or course of study even when they realize it is not aligned with their interests or career goals because they have invested significant time and tuition fees.
  5. Politics: Political leaders and policymakers may continue to pursue policies or strategies even when it is clear that they are not working, often due to political pressures and the desire to avoid admitting failure.

Impact on Decision-Making

The escalation of commitment can have several negative impacts on decision-making:

  1. Financial Losses: Continuing to invest in a failing project or venture can lead to substantial financial losses for businesses and individuals.
  2. Wasted Resources: Resources such as time, energy, and effort may be wasted on endeavors with little chance of success.
  3. Strained Relationships: In personal relationships, persisting in an unhealthy or failing partnership can lead to emotional distress and damage relationships further.
  4. Missed Opportunities: Focusing on failing endeavors can divert attention and resources away from potentially more promising opportunities.
  5. Reputation Damage: In organizations, leaders who escalate their commitment to failing projects may damage their reputation and credibility.

Strategies to Mitigate Escalation of Commitment

Recognizing and mitigating the escalation of commitment is essential to making rational decisions. Here are some strategies to help individuals and organizations avoid falling into this cognitive trap:

  1. Set Clear Decision Criteria: Establish clear criteria for making decisions and stick to them. Decisions should be based on objective factors rather than emotional attachment to prior investments.
  2. Regularly Review Decisions: Periodically review and evaluate decisions to ensure they are still aligned with current information and goals. If the situation has changed, be willing to adjust the course of action.
  3. Encourage Dissent: Create an environment where dissenting opinions and contrary evidence are welcomed and encouraged. This can help prevent confirmation bias and groupthink.
  4. Use Decision-Making Committees: In organizational settings, decision-making committees with diverse perspectives can help prevent individuals from becoming too personally invested in a particular course of action.
  5. Seek External Advice: Consult with individuals outside the immediate decision-making process who can provide unbiased input.
  6. Implement Escalation Protocols: Develop escalation protocols or criteria that trigger a reevaluation of decisions when certain conditions are met.

Conclusion

Escalation of commitment, driven by the sunk cost fallacy and cognitive biases such as loss aversion and confirmation bias, is a common phenomenon that can lead to irrational decision-making. Understanding the psychological mechanisms behind this behavior is crucial for individuals and organizations to avoid the negative consequences of persisting in failing endeavors. By implementing strategies to mitigate the escalation of commitment, individuals and organizations can make more rational decisions that are based on current information and objectives rather than past investments. Recognizing when it is time to cut losses and change course is a fundamental skill for effective decision-makers.

Examples of the Escalation of Commitment:

  • Business Expansion:
    • A company invests heavily in expanding into a new market, but the venture consistently underperforms. Despite mounting losses, the company continues to allocate resources to the failing venture to justify prior investments.
  • Gambling:
    • An individual visits a casino and initially loses money while playing a slot machine. In an attempt to recoup their initial losses, they continue to pour money into the machine, hoping for a big win. This behavior persists despite ongoing losses.
  • War Efforts:
    • In military conflicts, governments may escalate their commitment to a war even as casualties mount and the chances of success diminish. The desire to justify the lives and resources already sacrificed can lead to prolonged conflicts.
  • Technology Projects:
    • A software development project experiences significant delays and cost overruns. Instead of reassessing the project’s feasibility, the organization continues to allocate additional funds and time, hoping to salvage the investment made so far.
  • Personal Relationships:
    • In failing romantic relationships, individuals may stay together despite ongoing issues and unhappiness. The desire to validate the time and emotional investment already devoted to the relationship can prevent them from seeking healthier alternatives.

Key Highlights of the Escalation of Commitment:

  • Investment Justification: The phenomenon involves persisting with a failing course of action due to prior investments, often driven by a desire to avoid feeling wasteful.
  • Risk Aversion: Individuals tend to prioritize avoiding losses over seeking potential gains, leading to suboptimal decision-making.
  • Rationalization: People often engage in cognitive processes to justify further investment, even when it no longer makes sense objectively.
  • Challenges: Escalation of commitment poses challenges in maintaining rational decision-making and avoiding the sunk cost fallacy, where past investments influence decisions.
  • Benefits: While it can lead to suboptimal outcomes, persistence in some cases may result in achieving the original goal despite initial setbacks.

Connected Thinking Frameworks

Convergent vs. Divergent Thinking

convergent-vs-divergent-thinking
Convergent thinking occurs when the solution to a problem can be found by applying established rules and logical reasoning. Whereas divergent thinking is an unstructured problem-solving method where participants are encouraged to develop many innovative ideas or solutions to a given problem. Where convergent thinking might work for larger, mature organizations where divergent thinking is more suited for startups and innovative companies.

Critical Thinking

critical-thinking
Critical thinking involves analyzing observations, facts, evidence, and arguments to form a judgment about what someone reads, hears, says, or writes.

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.

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.

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.

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.

Lindy Effect

lindy-effect
The Lindy Effect is a theory about the ageing of non-perishable things, like technology or ideas. Popularized by author Nicholas Nassim Taleb, the Lindy Effect states that non-perishable things like technology age – linearly – in reverse. Therefore, the older an idea or a technology, the same will be its life expectancy.

Antifragility

antifragility
Antifragility was first coined as a term by author, and options trader Nassim Nicholas Taleb. Antifragility is a characteristic of systems that thrive as a result of stressors, volatility, and randomness. Therefore, Antifragile is the opposite of fragile. Where a fragile thing breaks up to volatility; a robust thing resists volatility. An antifragile thing gets stronger from volatility (provided the level of stressors and randomness doesn’t pass a certain threshold).

Systems Thinking

systems-thinking
Systems thinking is a holistic means of investigating the factors and interactions that could contribute to a potential outcome. It is about thinking non-linearly, and understanding the second-order consequences of actions and input into the system.

Vertical Thinking

vertical-thinking
Vertical thinking, on the other hand, is a problem-solving approach that favors a selective, analytical, structured, and sequential mindset. The focus of vertical thinking is to arrive at a reasoned, defined solution.

Maslow’s Hammer

einstellung-effect
Maslow’s Hammer, otherwise known as the law of the instrument or the Einstellung effect, is a cognitive bias causing an over-reliance on a familiar tool. This can be expressed as the tendency to overuse a known tool (perhaps a hammer) to solve issues that might require a different tool. This problem is persistent in the business world where perhaps known tools or frameworks might be used in the wrong context (like business plans used as planning tools instead of only investors’ pitches).

Peter Principle

peter-principle
The Peter Principle was first described by Canadian sociologist Lawrence J. Peter in his 1969 book The Peter Principle. The Peter Principle states that people are continually promoted within an organization until they reach their level of incompetence.

Straw Man Fallacy

straw-man-fallacy
The straw man fallacy describes an argument that misrepresents an opponent’s stance to make rebuttal more convenient. The straw man fallacy is a type of informal logical fallacy, defined as a flaw in the structure of an argument that renders it invalid.

Streisand Effect

streisand-effect
The Streisand Effect is a paradoxical phenomenon where the act of suppressing information to reduce visibility causes it to become more visible. In 2003, Streisand attempted to suppress aerial photographs of her Californian home by suing photographer Kenneth Adelman for an invasion of privacy. Adelman, who Streisand assumed was paparazzi, was instead taking photographs to document and study coastal erosion. In her quest for more privacy, Streisand’s efforts had the opposite effect.

Heuristic

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.

Recognition Heuristic

recognition-heuristic
The recognition heuristic is a psychological model of judgment and decision making. It is part of a suite of simple and economical heuristics proposed by psychologists Daniel Goldstein and Gerd Gigerenzer. The recognition heuristic argues that inferences are made about an object based on whether it is recognized or not.

Representativeness Heuristic

representativeness-heuristic
The representativeness heuristic was first described by psychologists Daniel Kahneman and Amos Tversky. The representativeness heuristic judges the probability of an event according to the degree to which that event resembles a broader class. When queried, most will choose the first option because the description of John matches the stereotype we may hold for an archaeologist.

Take-The-Best Heuristic

take-the-best-heuristic
The take-the-best heuristic is a decision-making shortcut that helps an individual choose between several alternatives. The take-the-best (TTB) heuristic decides between two or more alternatives based on a single good attribute, otherwise known as a cue. In the process, less desirable attributes are ignored.

Bundling Bias

bundling-bias
The bundling bias is a cognitive bias in e-commerce where a consumer tends not to use all of the products bought as a group, or bundle. Bundling occurs when individual products or services are sold together as a bundle. Common examples are tickets and experiences. The bundling bias dictates that consumers are less likely to use each item in the bundle. This means that the value of the bundle and indeed the value of each item in the bundle is decreased.

Barnum Effect

barnum-effect
The Barnum Effect is a cognitive bias where individuals believe that generic information – which applies to most people – is specifically tailored for themselves.

First-Principles Thinking

first-principles-thinking
First-principles thinking – sometimes called reasoning from first principles – is used to reverse-engineer complex problems and encourage creativity. It involves breaking down problems into basic elements and reassembling them from the ground up. Elon Musk is among the strongest proponents of this way of thinking.

Ladder Of Inference

ladder-of-inference
The ladder of inference is a conscious or subconscious thinking process where an individual moves from a fact to a decision or action. The ladder of inference was created by academic Chris Argyris to illustrate how people form and then use mental models to make decisions.

Goodhart’s Law

goodharts-law
Goodhart’s Law is named after British monetary policy theorist and economist Charles Goodhart. Speaking at a conference in Sydney in 1975, Goodhart said that “any observed statistical regularity will tend to collapse once pressure is placed upon it for control purposes.” Goodhart’s Law states that when a measure becomes a target, it ceases to be a good measure.

Six Thinking Hats Model

six-thinking-hats-model
The Six Thinking Hats model was created by psychologist Edward de Bono in 1986, who noted that personality type was a key driver of how people approached problem-solving. For example, optimists view situations differently from pessimists. Analytical individuals may generate ideas that a more emotional person would not, and vice versa.

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 in marketing can be associated with social proof.

Moore’s Law

moores-law
Moore’s law states that the number of transistors on a microchip doubles approximately every two years. This observation was made by Intel co-founder Gordon Moore in 1965 and it become a guiding principle for the semiconductor industry and has had far-reaching implications for technology as a whole.

Disruptive Innovation

disruptive-innovation
Disruptive innovation as a term was first described by Clayton M. Christensen, an American academic and business consultant whom The Economist called “the most influential management thinker of his time.” Disruptive innovation describes the process by which a product or service takes hold at the bottom of a market and eventually displaces established competitors, products, firms, or alliances.

Value Migration

value-migration
Value migration was first described by author Adrian Slywotzky in his 1996 book Value Migration – How to Think Several Moves Ahead of the Competition. Value migration is the transferal of value-creating forces from outdated business models to something better able to satisfy consumer demands.

Bye-Now Effect

bye-now-effect
The bye-now effect describes the tendency for consumers to think of the word “buy” when they read the word “bye”. In a study that tracked diners at a name-your-own-price restaurant, each diner was asked to read one of two phrases before ordering their meal. The first phrase, “so long”, resulted in diners paying an average of $32 per meal. But when diners recited the phrase “bye bye” before ordering, the average price per meal rose to $45.

Groupthink

groupthink
Groupthink occurs when well-intentioned individuals make non-optimal or irrational decisions based on a belief that dissent is impossible or on a motivation to conform. Groupthink occurs when members of a group reach a consensus without critical reasoning or evaluation of the alternatives and their consequences.

Stereotyping

stereotyping
A stereotype is a fixed and over-generalized belief about a particular group or class of people. These beliefs are based on the false assumption that certain characteristics are common to every individual residing in that group. Many stereotypes have a long and sometimes controversial history and are a direct consequence of various political, social, or economic events. Stereotyping is the process of making assumptions about a person or group of people based on various attributes, including gender, race, religion, or physical traits.

Murphy’s Law

murphys-law
Murphy’s Law states that if anything can go wrong, it will go wrong. Murphy’s Law was named after aerospace engineer Edward A. Murphy. During his time working at Edwards Air Force Base in 1949, Murphy cursed a technician who had improperly wired an electrical component and said, “If there is any way to do it wrong, he’ll find it.”

Law of Unintended Consequences

law-of-unintended-consequences
The law of unintended consequences was first mentioned by British philosopher John Locke when writing to parliament about the unintended effects of interest rate rises. However, it was popularized in 1936 by American sociologist Robert K. Merton who looked at unexpected, unanticipated, and unintended consequences and their impact on society.

Fundamental Attribution Error

fundamental-attribution-error
Fundamental attribution error is a bias people display when judging the behavior of others. The tendency is to over-emphasize personal characteristics and under-emphasize environmental and situational factors.

Outcome Bias

outcome-bias
Outcome bias describes a tendency to evaluate a decision based on its outcome and not on the process by which the decision was reached. In other words, the quality of a decision is only determined once the outcome is known. Outcome bias occurs when a decision is based on the outcome of previous events without regard for how those events developed.

Hindsight Bias

hindsight-bias
Hindsight bias is the tendency for people to perceive past events as more predictable than they actually were. The result of a presidential election, for example, seems more obvious when the winner is announced. The same can also be said for the avid sports fan who predicted the correct outcome of a match regardless of whether their team won or lost. Hindsight bias, therefore, is the tendency for an individual to convince themselves that they accurately predicted an event before it happened.

Read Next: Biases, Bounded Rationality, Mandela Effect, Dunning-Kruger Effect, Lindy Effect, Crowding Out Effect, Bandwagon Effect.

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Gennaro is the creator of FourWeekMBA, which reached about four million business people, comprising C-level executives, investors, analysts, product managers, and aspiring digital entrepreneurs in 2022 alone | He is also Director of Sales for a high-tech scaleup in the AI Industry | In 2012, Gennaro earned an International MBA with emphasis on Corporate Finance and Business Strategy.
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