Archive for February 12th, 2015

February 12, 2015

Escalation of Commitment

lbj by Bill Mauldin

Escalation of commitment was first described by business professor Barry M. Staw in his 1976 paper, ‘Knee deep in the big muddy: A study of escalating commitment to a chosen course of action.’ More recently the term ‘sunk cost fallacy’ has been used to describe the phenomenon where people justify increased investment in a decision, based on the cumulative prior investment, despite new evidence suggesting that the cost, starting today, of continuing the decision outweighs the expected benefit. Such investment may include money, time, or even — in the case of military strategy— human lives (the term has been used to describe the US commitment to military conflicts including Vietnam and Iraq).

The phenomenon and the sentiment underlying it are reflected in such proverbial images as ‘Throwing good money after bad,’ ‘In for a dime, in for a dollar,’ or ‘In for a penny, in for a pound.’ A common example irrational escalation is a bidding war; the bidders can end up paying much more than the object is worth to justify the initial expenses associated with bidding (such as research), as well as part of a competitive instinct. The main drivers of the tendency to invest in losing propositions are: Social (peer pressure), Psychological (gambling), Project (past commitments), and Structural (cultural and environmental factors). After a heated bidding war, Canadian financier Robert Campeau ended up buying Bloomingdale’s for an estimated $600 million more than it was worth. The ‘Wall Street Journal’ noted that ‘we’re not dealing in price anymore but egos.’ Campeau was forced to declare bankruptcy soon afterwards.