Nonrational Escalation of Commitment

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Please see response attached, including one highly relevant article. It provides ample information to draw on. I hope this helps and take care.

RESPONSE:

1. Describe the circumstances that led to the commitment being escalated.

In one study, the authors found that the driving force behind escalation behavior is improper use of initial positive beliefs in the face of negative new information. (1)For example, the "bad" hiring decision. To fire the individual is an announcement of making a mistake. Escalate through providing confirming (rather than disconfirming) information. Escalate in order to appear consistent. (2)

Example 1: (from attached article) (3)

Marketing managers are often asked to make major decisions even though the information available to them at the time of the decision is incomplete and uncertain. Typical examples of such decision situations are launching a new product, initiating an every day low pricing, or a "no promotions" strategy, opening a new channel structure, and initiating a major new media campaign. Given that the decision environment is often highly uncertain and the financial stakes large, it is not surprising that firms often revisit such decisions after they obtain new information to determine if the firm should continue with, modify, or terminate the initially chosen course of action. (3)

It is well-documented that managers who are publicly committed to a course of action tend, when asked to re-evaluate that action, to remain committed to it even when the new information indicates the action should be terminated. See, for example, studies of the Vietnam War and Desert Storm (Lipshitz 1991), case studies of Expo 86 (Ross and Staw 1986), the Apollo moon missions (Mitroff 1974), the Campeau-Federated merger, the coffee wars between Philip Morris and P&G (Bazerman and Neale1992), the NBA draft (Staw and Hoang 1995), information technology projects (Keil 1995; Keil, Mann, and Rai 2000), and a plethora of experimental investigations (Arkes and Blumer 1985; Boulding, Morgan, and Staelin 1997; Brockner and Rubin 1985; and Staw 1976).) This stylized fact, often referred to as "escalation of commitment," can be disastrous for firms, especially in today's hyper-competitive markets that require fast and accurate reactions and adaptability on the part of companies. (3)

The development and introduction of new products seem particularly susceptible to the problem of escalation of commitment. Schmidt and Calantone (1998) showed that innovative projects tend to generate a high level of commitment from managers, often leading to ongoing investment in failing projects. This sentiment is echoed by industry practitioners. The director of the New Products Showcase and Learning Center has stated that "It sometimes takes more courage to kill a product that's going nowhere than to sustain it" (Lukas 1998). Likewise, a former CEO of Eastman Kodak speaking to participants in a senior executive education program said that he considered a new product team a "success" when they appropriately decided to stop investing in a new product idea and labeled the project "the world's fastest failure." (3)

EXAMPLE:

The authors of the attached article used the new product introduction setting to further explore the reasons why managers tend to stick with losing courses of action. We start by developing a model of how managers combine specific information about the potential product and their prior business experience to decide whether to launch a new product and, if they choose to launch the product, how they decide whether to continue with the venture after receiving negative new information. We then estimate the parameters of this model based on data ...