The Escalation of

Commitment
The Escalation of Commitment
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
The Escalation of Commitment
• Committing to an initial decision
• Competition and escalation
• Explanations for escalation
The Escalation of Commitment
• You personally decided to hire a new manager to work for you. Although
you had expected excellent achievement, early reports suggests that she is
not performing as you had hoped. Should you fire her?
• You accept a position with a prestigious consulting firm, believing that the
job offers an excellent career opportunity in an organization that has room
for you to grow. Two years later, you have not progressed as you had
hoped. Anxious to demonstrate your worth to the company, you decide to
invest large amounts of unpaid overtime to get ahead….
• You work for a private equity firm and make a decision to invest a hundred
million rupees in a start-up venture. You personally argued for this
investment against some skeptics in your firm…..
The Escalation of Commitment
• What was common in these decisions
• You have to make a decision as a result of a previous decision
• You have already invested a great deal of time, effort and resources
• Things are not working out as you planned

• Other scenarios
The Escalation of Commitment
• Non rational escalation
• The degree to which an individual escalates commitment to a
previously selected course of action to a point beyond that which a
rational model of decision making would prescribe
• The concept of sunk cost
The Unilateral Escalation Paradigm
• Factors influencing escalation
• Self-justification
• Cause of a setback
• Groups versus individuals
Factors influencing escalation
• Self-justification
• when people are the only ones who fail, they are particularly likely to invest
more into their prior decisions following an initial failure. As escalation is one
way to eliminate dissonance with negative feedback
Factors influencing escalation
• Cause of a setback
• 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
Factors influencing escalation
• Groups versus individuals
- 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
• Other examples of escalation
• Employee evaluations and hiring managers
• Mountain climbing
The Auction!
• I am about to auction off this 1000 note. You are free to participate or
just watch the bidding of others. People will be invited to call out bids
in mul­tiples of Rs50 until no further bidding occurs, at which point the
highest bidder will pay the amount bid and win the Rs1000 note. The
only feature that dis­tinguishes this auction from traditional auctions is
a rule that the second-highest bidder must also pay the amount that
he or she bid, although he or she will obviously not win the 1000. For
example, if ABC bids 800 and XYZ bids 700, and bidding is stopped, I
would pay ABC Rs 200 (1000-800), and XYZ, the second-highest
bidder, would pay me 700.
The 1000 Note Auction
- The end result is almost always the same: the winner pays way over Rs1000 for
the bill.
- Clearly, this is irrational escalation to the auction.
- However, due to the competitive nature where the loser pays their bid, people continue
bidding out of hope that they will not have to pay for a Rs1000 bill that they will not
receive.
- The reason this happens is that people enter the auction expecting others not to bid
more than Rs1000
- However, it is easy to stay in the auction in order to avoid a sure loss by bidding just a hundred rupees
more
- In addition, people feel a need to justify their original decision to enter the auction by remaining in
the auction and avoiding a sure loss.
- People feel that by bidding, the other party will be more likely to drop out of the auction. However,
both parties often believe this and it leads to a serious of irrational bids.
The 1000 Note Auction
- One of two strategies could have worked in preventing this auction from
leading to such an irrational outcome.
- By considering the perspective of other competitors, people may realize that the game is
a trap and choose not to bid a single dollar in the first place.
- Alternatively, the class could collude and arrange for a single person to bid Rs 50 while
the class divides the Rs950 profit amongst themselves.
The Competitive Escalation Paradigm
• Company A and B compete fiercely in an industry
• Company C is an important third player and a potential acquisition target
• C is worth $1 billion as a stand alone company
• C would be worth $1.2 billion if managed by A or B
• If A were to acquire C, B would be at a disadvantage and would lose $0.5
billion
• It would be similarly destructive to A if B were to acquire C
• If either A or B makes an offer for C, the other company will learn about the
offer
• As head of Company A, what do you do
The Competitive Escalation Paradigm
• Other competitive situations
• 1995 sale of USAir
• We continue to believe, as we always have, that the best way for American to increase
its size and reach is by internal growth—not by consolidation. . . . So we will not be the
first to make a bid for USAir. On the other hand, if United seeks to acquire USAir, we will
be prepared to respond with a bid, or by other means as necessary, to protect
American’s competitive position (Ziemba, 1995)
• 2006 sale of Guidant
• Reverse-bid auctions
Why Does Escalation Occur?
• Perceptual biases
• Judgmental biases
• Impression management
• Competitive irrationality
Factors influencing escalation
• Perceptual biases
• Biased information processing
• Identifying the potential for escalation
• Outside evaluation
• Imagining regret on escalation
Factors influencing escalation
• Judgmental biases
• Loss framing
• Consulting independent advisors
Factors influencing escalation
• Impression management
• Preferences for consistency
• Rewarding decisions, not outcomes
Factors influencing escalation
• Competitive irrationality
Recommendations
• Adopt an experimenting approach
• How long a startup should continue to lose money?
• Consider future costs and benefits