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Escalation of Commitment Managerial Decision Making

Escalation of Commitment Managerial Decision Making

Escalation of commitment refers to the psychological condition whereby people continue to support or believe in something that is repetitively failing. In managerial decision making escalation of commitment can refer to either continuing with a failed or dud project. It may also refer to overestimating one’s own managerial capacity or ability. This is an extension of problem solving where people do not accept they do not have a solution or they have to let go. With escalation of commitment there is a compulsion to not let go. This can be where you have an emotional, psychological or financial investment that may be failing and has led to an irrational compulsion to stick with it or even escalate your commitment.

Escalation of commitment managerial decision makings is where managers increase their investment or project despite failure or losses. The evidence shows the project should be halted but they are tied to it subconsciously and consciously and continue almost trance like. The expression "throwing good money after bad" describes escalation of commitment, in a decision. You may see escalation of commitment in a stock investment where you average down on a falling stock price.

You may see it in gambling as you chase losing bets. You may see it in the military with the escalation of losing wars. Here the cost is human lives. You see it in business and government with escalation of commitment despite changed circumstances. This would explain so many ‘white elephants’. Other examples are in auctions for art and houses where an emotional attachment combines with ego. Managerial decision making in these circumstances can be disastrous.

Escalation of Commitment Managerial Decision Making

Escalation of Commitment Managerial Decision Making

Psychology of Investing

Escalation of Commitment in Investing

A very common escalation of commitment managerial decision making is when people manage personal investments. Despite best laid plans that start out with seeking positive returns when an investment turns to loss sometimes individuals feel compelled not only to stick with their decision but to escalate the original investment. There are a few factors at work here there is the psychological attachment through ego, inability to admit you are wrong. There is an emotional attachment at play.

For some there is a reactance psychological effect, where you take the polar opposite to what logic would suggest. For example taking a loss on a bad investment. Selling a stock because the circumstances changed but you hold on because you react to the reverse of what you would be expected to do.

There is also the herd mentality affect. This is most common in the stock and property market. People stay in a bad position because everyone else is. People buy property because everyone else does despite being unable to afford it. This is the very basis of the US subprime financial crisis where escalate of commitment from the homebuyer with no income to the bank to the ‘ponzi’ financial instruments that Goldman Sachs was sued for fraud over the abacus CDO.

Sunk Costs Effects

Managerial Decision Making with Sunk Costs in Business

Many make the decision to escalate their commitment because they have already sunk costs into their business.  A typical example is people save up to buy a restaurant because they love cooking and want to work for themselves. They have no business experience and have not developed a market. They sink their savings in the restaurant and quit their job. After six months the restaurant is struggling, the hours are longer than you thought and you have a lot of empty tables. You are at that point where you have tried it but the restaurant is just not going to make it.  Logic tells you to “cut your losses” and close the restaurant.

Now you have the sunk costs of your life savings and an emotional attachment from your dream restaurant venture. So what do you do you escalate the commitment and invest even more money. The hope is the additional cash will see the business turn positive. You may even borrow and further scale the commitment. Many of us just can’t admit we are wrong, worry about what people think and become fixated on material gains and losses. This has become a very common occurrence in modern society which until the global debt crisis credit was given out like candy.

With the escalation of commitment people ignore the course of action based on future benefits minus any costs. Their whole decision is based on the sunk costs in the project.  Managerial decision making needs to take into account of the going concern and when to terminate a failed project. This is also the danger of starting a business without a budget or drop dead level.

Managerial Decision Making

Recognizing Escalation of Commitment Managerial Decision Making

When make an investment decision and it has been vindicated it may well be that an escalation of commitment would be the correct decision. That is increase the investment, horizontal or vertical integration for example to escalate the success. Managerial decision making involves recognizing when a decision is working, when it isn’t and how much time should be given to a decision that hasn’t. How long do you continue to sink costs into a failing project, a superseded invention or a bad stock position?

The decision becomes a lot easier when recognizes past present and future with emotional detachment. We must recognize this in relation to costs that have been spent, are being spent and will be spent. With this a proper understanding of sunk costs is possible. If it is a cost that has already been incurred or there is a contractual obligation to incur it than it is a sunk cost. Like a sunken ship the money is spent, it is sunk. Unlike the Titanic there isn’t a Rupert Murdoch to back the movie for a billion dollar profit. In other words going forward recognizing escalation of commitment means recognizing the cost is sunk and won’t be coming back.

Thus any decision in investing, a project or invention is to be based on costs that are reasonably expected in the future.

Again I reiterate monies spent are gone and are irrelevant to costs that you will spend in the future. This is important to recognize and will take out the emotion of cutting losses. Thus future gains can be matched against future expenses. This will enable a decision made on viability not of hope. Recognizing escalation of commitment can live you to fight another day with money in the kitty.

Rational Thinking For Success

Barriers to Rational Thinking

Whilst it is easy to avoid the pitfalls of escalation of commitment in theory rational thinking can be blurred in actuality. This is because of the tangible costs and intangible costs. Tangible costs after the time and money spent or sunk. Irrational costs are the psychological and emotional charges spent. These are not as easily recognized and therefore acknowledged. This is where irrational influences can influence the rational. It is breaking this nexus between the tangible and intangible costs that needs be done to enable rational managerial decision making.

We see this clearly in stock markets where people average down into bad stock market positions. Where there is only a small percentage will escalate their commitment profitably. That is adding to a profitably stock position as it goes up. Many wouldn’t even think of that strategy. The herd lets losses run, or adds to it through escalation of commitment. The herd also tends to cut their winners too quickly. You can apply this stock market analogy to so many other things in life.

Almost anything where a person feels the need to justify their position and lets ego get involved carries this event risk. This leads to an irrational decision after a rational decision has failed but the manger is blinded because of the previous rational thinking and sunk costs. It is imperative to separate the emotional and psychological factors from the costs already spent your sunk costs. Once you have done that you can avoid the escalation of commitment.

Competitive Branding Escalation of Commitment

There are many examples of escalation of commitment in the consumer market. The biggest would be Coke and Pepsi. Remember the money spent on the Michael Jackson commercial by Pepsi. The failure of “New Coke”. We saw the same in the instant coffee wars with Maxwell House and Folgers. With film we saw Fuji, Polaroid and Kodak. We see it with cars, failed movies like 1942 and Waterworld. 

These happened with a combination of incredible ego and managers overestimating the impact of their managerial skill and that of the advertising companies. This s also referred to as managerial conceit which leads to an illusion of control. This is why these obvious failures (in hindsight) spiral so hugely out of control. One could also look at the recent bailouts in the Untied States which have failed to turn the U.S. economy around despite the trillions spent. Brand addled terms are even used to justify these actions such as QE (Quantitative Easing).

Escalation of Commitment Studies

Escalation of Commitment Study

The term escalation of commitment first came to prominence in 1976 when Barry Shaw wrote a paper “knee deep in the big muddy: A study of escalating commitment to a chosen course of action” The term was used to describe investments in failing technology; you can track the evolution of the computer industry like that. Let’s just take the last few years. We have Microsoft losing Market share to Linux and Apple. We saw the failure of the Kin phone by Microsoft though they did not escalation commitment cutting the phone after a few months of failure

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Military spending and wars are a very good example, where egos get involved significantly. Think of the Vietnam War, the Soviets in Afghanistan and more recently the Coalition in Iraq and Afghanistan. There are many civil wars going on around the world that are classic examples of the escalation of commitment. Of course the cost is much more poignant here, it is human lives. Emotionally the largest irrationality leading to escalation of commitment is gambling, in casino games and horse racing for example. The term “roll the dice” is a perfect example of irrationality.

Take the time if you could to feel out the poll below to help determine the frequency of irrational escalation of commitment.

Escalation of Commitment Poll

Surviving Financial Bubbles

Irrational Escalation of Commitment in Bubbles

An example of an irrational escalation of commitment is in an auction. The crowd situation helps feed the manic setting. People bidding up a house beyond their safety level, the recent record prices at the million dollar comic auctions, jewelry auctions, wine auctions and art auctions all have the hallmarks of the escalation of commitment. In the financial markets the most glaring example is the current gold bullion mania. Just get on to a Gold Bugs forum and you will see what I mean. Rationality goes out the window, previous limits are ignored. Each new level is brought with a new self justification.

The history of any bubble is the same. The most recent is the U.S. subprime fueled property bubble which sent the world into financial crisis and saw the collapse of Lehman Brothers.

Perhaps the best example is the rise and fall of the Canadian entrepreneur Robert Campeau who went bankrupt after buying Federated Stores in 1988. Federated Stores owned Bloomingdales. He paid over’s as his ego drove his decision making which a huge Leveraged Buy Out. He paid over $600 million over what his debt financing could cover. This was a particularly powerful example of escalation of commitment where the Reichman brothers bought Bloomingdales went bankrupt also. Bloomingdales led to two groups to become irrational and their egos clouded reality.

The Wall Street Journal reported at the time on the Bloomingdales purchase as follows; "we're not dealing in price anymore but egos. “ Frank Black released a single about 17 years ago “Hang on to your ego”. He could have been writing about rule number one for escalation of commitment managerial decision making.

Comments on Escalation of Commitment Managerial Decision Making

billyaustindillon (author) on September 30, 2011:

Hi Kim it can be tough fighting against he herb and that is the trouble with an escalation of commitment as emotion can get involved. Step back look at the sunken costs be rational and use that in your argument and you will be closer to what you need to portray. Don't worry about being a naysayer - half the reason we are in the problem we are today is because we have become a land of the sheeple.

Kim Harris on September 30, 2011:

I'm baaaaaaack! Hi Billyaustindillon:) The title caught my eye again, because I'm currently on a project at work that falls into this category! I'm in a bind where if I say the project is doomed, I'm seen as a naysayer. I really think we should abort now and it's only been three weeks. My all time favorite movie is Apollo 13 because they are able to think and problem solve rationally in a life threatening situation - a sinking space ship. In this case there is a happy ending. I so hope I'm wrong about being knee deep in the Muddy!

billyaustindillon (author) on August 19, 2010:

Micky thanks for your comments - didn't know I used the term liberal here btw. You are dead right on politics and that is why blind partisan politics can be so dangerous. Unfortunately America is the posterchild of that right now - 500k intial claims today - wow! That says it all. There is somethinmg in the God remark - studies have shown that conscience affects are glaring here.

Micky Dee on August 19, 2010:

Geez- I get so turned off when I see "liberal" this or that. The separating continues. I'm getting off track Billy. Isa the the "liberal" reference and it just sickens me. Our government has been exploiting terrorism since it's inception. Both political parties give you "chosen" candidates. Real candidates who would improve our world are dismissed as "un-electable". Meanwhile our country and the demolishing of the world continues and America is NEVER moved from DEAD center of the MASTERMINDS! America is having problems because thaey do not know God!

billyaustindillon (author) on August 16, 2010:

James you hit the nail on the head there with the socialist revisionists - Stalain would be spun poisitive if it is useful to the cause no doubt.

James A Watkins from Chicago on August 15, 2010:

This is truly an excellent report. You are right on, and this syndrome is quite common. I see it also in American Socialists (or Liberals, as they call themselves). Even though their plot has failed 100% of the time it has been implemented, they still can't stop promoting it. Their lives are invested in it. They'll even defend Stalin if they have to. :D

billyaustindillon (author) on August 14, 2010:

Expandyourmind I loved your comment - a condition indeed and I think if we are all honest we have all felt it ourselves.

billyaustindillon (author) on August 14, 2010:

Winged Centaur thank you for your detailed and enthralling feedback. There are so many great examples here and illustrations of how the political system dominates the rational despite itself. There isn't much I can add to your wisdom.

ExpandYourMind from Midwest USA on August 14, 2010:

Fascinating . . . so there's any actual condition to explain what I sometimes say "what was I thinking," after I get home with my auction prize. Thanks. I will reread this one.

William Thomas from That Great Primordial Smash UP of This and That Which Gave Rise To All Beings and All Things! on August 14, 2010:

Good Day billyaustindillon

This is a very interesting topic, well handled by you. I have heard "escalation of commitment" (in the face of evidence that an immediate course correction is in order) described as the "mechanism of fetishist disavowal" by the Slovenian philosopher Slavoj Zizek.

He's talking about the same thing you are, billyaustindillon: "I know very well but...." You just want to hang in there because maybe you think you'll be vindicated "in the end," in a variety of ways.

Sometimes people can escalate commitment or stay on a course of action or hold onto an outmoded belief because they are drawing on a time when their belief, course of action, or commitment was valid, worked, and was actually correct; but they fail to respond to the changing times.

For many of us on the Left, American democracy is an example. Again something Slavoj Zizek said (on the October 15, 2009 episode of an alternative news program called DemocracyNow! with Amy Goodman and Juan Gonzales on WBAI 99.5 FM in my area): nobody believes in democracy but "... we act as if it works."

Now, there are two veteran Leftist political activists, scholars, and writers who would endorse that viewpoint and apply it to America. You can Google them, of course. There's Tariq Ali (who would apply this to America politically) and Michael Parenti (who would apply this to America economically).

What they would say (and I find this convincing) is that American democracy, such as it is, worked at its best during the Cold War against the Soviet Union. That period, 1945-1989 was a period of intense, global, propagandistic, ideological conflict between the two superpowers -- a referendum on which "Way of Life" was superior (Soviet Communism or American-style representative democracy and capitalism).

What Parenti and Ali would say that it was during this Cold War period when the United States ruling class had an interest in making democracy "work," to have the country "put its best foot forward," as it were, to impress the rest of the world as to how free and wealthy we were, how superior we were to the Soviet Union.

What they would also say is that with the fall of the Soviet Union, the need to impress fell as well. As Michael Parenti put it in one of his speeches: with the fall of the Soviet Union the United States went from "capitalism with a 'human face' to capitalism IN YOUR FACE!" There's nobody around to impress anymore, you see.

Anyway, they would say that too many people are behaving as if this was 1945-1989 and not 2010, in a variety of ways. The unjusified faith (for "faith" is what it is) in the so-called two-party political system of ours, is one example....

Why don't I leave it there? Listen, good job. Voted up for useful.

billyaustindillon (author) on August 14, 2010:

HappyHer you are so right, it is about sticking with the familiar. Many of us are lemmings, mere ghosts in the machine.

billyaustindillon (author) on August 14, 2010:

Stars we are basically socially programed this way and hence why it is so hard to avoid entrapment in the escalation of commitment

Tracy Morrow from Cleveland, OH on August 13, 2010:

This really made a lot of sense. Something about sticking with the familiar, even if it's not working kind of makes me think we are a bunch of lemmings.

billyaustindillon (author) on August 13, 2010:

Shaz cars can be veruy emotionally bonding - most of us remember our first one. Does sound like a classic case of escalation of commitment - lemons are often a reflection of this in cars.

stars439 from Louisiana, The Magnolia and Pelican State. on August 13, 2010:

Wow, so very true. How we make this major error sometimes. It must take I guess a bold awareness to avoid this from happening. Not sure I understand all of what your saying. Very interesting. God Bless You

shazwellyn on August 13, 2010:

I presently have an escalation of commitment to my car! Wasting good money after bad, I have had to consciously tell myself to let it go and move on. Identifying this in myself has been a real surprise because I never thought of myself in being so bound to material possessions - it just goes to show, w think we know ourselves, when really we don't!

Good niche article Andrew! :)

billyaustindillon (author) on August 12, 2010:

Drbj I look forward to reading your hub on management of agreement - you are so right it is a very fine line and I think that is what catches people out.

billyaustindillon (author) on August 12, 2010:

Springboard it does sound like you are committed :) Thanks for commenting.

billyaustindillon (author) on August 12, 2010:

Mysterylady I agree great comments reminds me of the joke of the guy who dug three holes - because the first two weren't deep enough.

billyaustindillon (author) on August 12, 2010:

Peggy well said and when you think that Ben Bernanke is meant to be a stupid of the depression you have to ask why are they doing what they are doing? Clearly the machine runs Washington and just spits out the same delusions in an ever constant escalation of commitment as evidenced by the ever expanding current account and budget deficits.

billyaustindillon (author) on August 12, 2010:

Katie very well voiced - unfortunately the very nature of escalation of commitment is that people become more and more entrenched in ailed situations and believe in failed ideologies - politics being a glaring example and how the masses can fall for it particularly with blind partisan politics. It is all about taking responsibility - with your eyes open.

drbj and sherry from south Florida on August 12, 2010:

Fascinating topic, billy, and you covered it extremely well. The escalation of irrational commitment in managerial decision making first came to my attention some years ago when I read a book on the management of agreement. Both conditions are strikingly similar and may help to explain some of the irrational decisions being made by our current leaders (?).

Currently writing a hub on the Management of Agreement and would be happy to link to yours when published.

Springboard from Wisconsin on August 12, 2010:

I think it comes down to adapting and changing and compensating. Maybe that's still a sense of escalation of commitment...but somehow I feel committed to that...

mysterylady 89 from Florida on August 12, 2010:

I really liked the comments by amillar and Merlin.Instead of climbing out of a hole, we keep getting in deeper and deeper.

Peggy Woods from Houston, Texas on August 12, 2010:

Amazing...just plain amazing that our government seems to be stuck in the same rut (escalation of commitment) instead of trying something new. If we cannot learn from history it is sure to repeat itself...and there are plenty of examples of what does not work.

Katie McMurray from Ohio on August 12, 2010:

Boy oh BOY have you ever hit on a nerve, I see people believing in things that are clearly a thing of the past. When will people wake up and realize the old politics and securities of yesterday or ten minutes ago are gone. We must all learn to do more with less, creat wealth for our futures on our own as nobody will ever give two shakes about your money but you PLUS be responsible for it! Very good topic! Times are still a changing...and never to be the same again!

billyaustindillon (author) on August 11, 2010:

KIm I like the find yourself in a hole and stop digging phrase. The trouble many people never realize until the hole is too deep to climb out of!

billyaustindillon (author) on August 11, 2010:

Marty thanks for your comments on the silver my only view is many have perceived gold and silver as a safe haven from the fiat currencies. The worrying side to me is they are still commodities and bubbles IMHO. However as you know there are many gold bugs out there who would say I was shameful for even suggesting such a thing.

billyaustindillon (author) on August 11, 2010:

Peggy it never stops does it in the past 48 hours we have seen the Fed take up another 1/4 of a billion in mortgage bonds, record consumer imports and 400 billion ECB swap from the Fed - great live examples of the escalation of commitment.

billyaustindillon (author) on August 11, 2010:

50 thanks money tends to heighten all the psychological elements so is a great explainer so to speak. The way we are brought up it also becomes very ecocentric in the Western world.

billyaustindillon (author) on August 11, 2010:

AMillar Einstein's definition of insanity is so apt and how many times do you see it - thanks for your feedback.

Kim Harris on August 11, 2010:

rated up and useful billy. the whole time i was reading i was thinking about the definition of insanity that amillar gave: when you keep doing the same thing and expect a different result! Another one is, when you find you've dug yourself into a hole, stop digging! Nice hub, billyaustindillon. enjoyed it.

MartyWare from New South Wales Australia on August 11, 2010:

I really like this article Billy. I have really struggled with this in past times.

I recently made an investment with silver bullion, I jumped in a little late, and have thought about pulling out soon and re-couping my investment.

Any silver investers out there with advice would be appreciated.


Marty Ware

The SEO DAD & The creator of the Hubpages Tribe!

Peggy Woods from Houston, Texas on August 11, 2010:

Too bad you and others who are well versed on this subject cannot give a tutorial to our Congress who keeps spending more and more money on what will undoubtedly not pay off as an end result.

billyaustindillon (author) on August 11, 2010:

Wanderlust some good points. I think when you recognize the sunk costs in the project it is easier to recognize it is time to stop. Some do run out of money that may have made it - the key to a budget and knowing your loss potential. With stocks averaging bad decisions may not always come back as history has shown. The important thing is to avoid leveraging bad positions.

billyaustindillon (author) on August 11, 2010:

Merlin a very good question and one that I imagine comes in as last choice given the turnaround specialists motives. Thanks for your input. The question is at what point does it become a moral or ethical issue.

billyaustindillon (author) on August 11, 2010:

GL Strout thnaks for your feedback

billyaustindillon (author) on August 11, 2010:

Cybersupe I enjoyed you answer and the reference to hubbers LMOA Very correct observation about much of our daily lives and actions.

billyaustindillon (author) on August 11, 2010:

dahoglund thanks for your feedback. It is ahrd on auctions but have to be hard and fast as a dolalr becomes 10 become a 100 very quickly. In projects it is also hard if you don't take the sunk cost approach.

50 Caliber from Arizona on August 11, 2010:

Billy, once again you have touched on a subject that I had never considered as a part of financial decisions and how it does/could effect one as they gamble be it Vegas or portfolio, " let go of my ego" Ha! : ) 50

amillar from Scotland, UK on August 11, 2010:

This hub reminds me of the Albert Einstein quote. "The definition of insanity is doing the same thing over and over again and expecting different results". Unfortunately, it also reminds, me of me - but let's not go into that.

Another very interesting hub - thanks.

Wanderlust from New York City on August 11, 2010:

Great hub! Escalation of commitment, I guess we see it every day. Is it really our ego makes us stick with a bad project or bad investment? Actually some projects fail just because not enough money was invested in them. And some stocks look bad today but after awhile can go up again. But of course it is always an opportunity cost :)

Merlin Fraser from Cotswold Hills on August 11, 2010:

Hi Billy,

As a business adviser and one time trouble shooter I have bumbed into this problem many times and it is one of the hrdest nuts to crack.

How, as a paid consultant, do you stand before the man who signs the cheques and say,"I'm sorry to tell you the core of the problem facing your company is you !"

G L Strout from Ohio, USA on August 11, 2010:

What an interesting and well-done article! I learned a lot from this. Thank you.

CYBERSUPE from MALVERN, PENNSYLVANIA, U.S.A. on August 11, 2010:

Yo Dude, Escalation of commitment can be applied to many facets of life. Even for many Hubbers. Of course your Hubs are always interesting and most informative. Thanks Pal!

Don A. Hoglund from Wisconsin Rapids on August 11, 2010:

Whenever possible I try to plan ahead and set limits. If I go to an auction or bid on line, I decide what I am willing to pay.Sometimes it is tough not to go a penny more etc. On the job I may have tended to be stubborn about not giving up on a failed approach.

billyaustindillon (author) on August 11, 2010:

Hubpageswriter well stated. The subconscious mind plays a significant part in the escalation of commitment decision making handicap.

hubpageswriter on August 11, 2010:

Decisions making, making proactive ones, learning from mistakes and a whole lot more. Sometimes mistakes are realized but are still made. Perhaps that's what the subconscious mind doing its job, or not doing. Great hub, I learn a great deal from this.

billyaustindillon (author) on August 11, 2010:

Cluense thank you for your positive feedback on escalation of commitment.

billyaustindillon (author) on August 11, 2010:

Minnetonka Twin thank you for your feedback. Yes the ego can certainly lead us down challenged lanes can't it. As we see the Fed monetize more debt from the mortgage bonds - 250 billion to treasuries at yesterday's FOMC we see a living example of escalation of commitment.

Katie Luense from Buffalo, NY on August 10, 2010:

Awesome Post! I rated it up a notch! Keep on writing!

Linda Rogers from Minnesota on August 10, 2010:

Remarkable writing on Escalation of Commitment. This was easy to read and gave great information. This whole story seems to come back to the ALMIGHTY EGO. It is amazing how so many continue on investments and companies even when they see things are not working. Ego Ego Ego. Great hub. Thanks.

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