The Nonrational Escalation of Commitment

Presented by:

Hamid Shekari Omid Keivanloo

You personally decided to hire a manager He is not performing as you had hoped You think you have invested in his training You decide to invest in him a bit longer He is not performing as you had hoped, yet When should you give up on your “investment”?

Introduction

Unilateral

Competitive

Example 1: Hire a manager

You had hoped promotion in new company You have not progressed as you had expected You continue Still, no progress You think you are invested your best years with this

company. Do you quit?

Introduction

Unilateral

Competitive

Example 2: expect to promote

You agree to invest $2 million on a project In addition, you persuade some skeptics for this project After 1 year CEO tell you: Bad news: without additional investment you will lose

the $2 million Good news: if you invest another $1 million, we will

have a great success Do you invest more?

Introduction

Unilateral

Competitive

Example 3: invest more?

Personally make an initial decision Invest a great deal of time, effort or resources Things are not work as expectations Continue to justify or for our tendency to inertia Things are not work as expectations, yet Feel “ Too much invested to quit” Quit or not?

introduction

Unilateral

Competitive

Common processes in the examples

Recognize that time and expenses already invested are “sunk cost”

Put your reference point of action, your current state Consider all alternatives by evaluating only the future

costs and benefits

introduction

Unilateral

Competitive

Economists & accountant

Ignore the fact that you personally made the initial decision!!!

Unilateral

Competitive

How to avoid the non-rational tendency to escalation?

Introduction

Unilateral

Competitive

Staw’s study(1976):

Introduction High- responsibility participantLow-responsibility participant

Unsuccessful initial decision

> Successful initial decision

High- responsibility participant Low-responsibility participant=

Self-justification

Group vs. Individual Groups are less likely to escalate commitment If so, they tend to escalate commitment to a greater

degree

Playing time for NBA league players:Draft orders and money to sign players have strong effect on playing time

Unilateral

Competitive

Some points

Introduction

Hedge funds: They rotate portfolios on a regular basis so that who bought a commodity does not make decision to sell

C worth $1 million as a stand-alone company and would be worth $1.2 million if managed by A or B

If A buy C, B would lose $0.5 million and vice versa If either A or B makes an offer on C, the other will learn the

offer As the head of company A, what do you do

Unilateral

Companies A, B & C

Introduction

Competitive

Most frequent answer: $1.1 million

If one of them makes an offer, competitive will start andthe winner’s payment will be around $1.7 million whichEach of them lose $0.5 million.

An auction on $20 bill The first and 2nd highest bidder should pay

Unilateral

$20 vs. $1

Introduction

Competitive

$19 sure loss vs. $1 on risk$20 sure loss vs. $1 on risk

$204 sure loss better than $1 on risk

In both one make initial decision that he feels a need to justify through future decisions

Then reach the point where he has “ too invested to quit”

Unilateral

Unilateral vs. Competitive

Introduction

Competitive

In competition the desire to “win” serves an addedmotivation to escalate commitment

Similarity:

Difference:

The first step toward eliminating escalation from our behavioral repertoire is to identify the psychological factors that feed it.

Perceptual Biases

Judgmental Biases

Impression Management

Competitive Irrationality

Integration

Why Does Escalation Occur?

Causes After making the initial decision, we pay more attention

to confirming than disconfirming information

Solutions Search vigilantly for disconfirming information to

balance out the confirming information that we intuitively seek

Establishing monitoring systems

Perceptual Biases

Judgmental Biases

Impression Management

Competitive Irrationality

Integration

Causes Any loss from an initial investment will systematically

distort judgment toward continuing the previously selected course of action

Individuals tend to be risk averse to positively framed problems and risk seeking to negatively framed problems

Solutions Assess the new decision from a neutral reference point Choose a new decision maker to make the subsequent

decision

Perceptual Biases

Judgmental Biases

Impression Management

Competitive Irrationality

Integration

Causes One might decide to keep his initial decision on, even he

know it’s a failure, simply to “save face” The decision that focus on future costs and benefits is

the best one for organization, yet individuals more likely to be awarded for escalating commitment than for changing course (consistency)

Solutions Replace systems that encourage impression

management with those that reward good decisions Organizations should strive to make the employees’

values closer to those of the organization by modifying reward systems

Perceptual Biases

Judgmental Biases

Impression Management

Competitive Irrationality

Integration

Causes A situation in which two parties engage in an activity

that is clearly irrational, despite the fact that it is difficult to identify specific irrational actions by either party

Solutions Considering actions of others accurately to distinguish

opportunities from traps Arriving at a compromise

Perceptual Biases

Judgmental Biases

Impression Management

Competitive Irrationality

Integration

Each of four causes can cause escalation independently, but they more often act together

Findings on the tendency to escalate suggest that managers need to take an experimental approach to management

In certain scenarios, people should maintain or even escalate their commitment to a chosen course of action, primarily to keep their options open

The key is to make decisions without undue weight on the past and with expectations about the future that are as accurate as possible

Perceptual Biases

Judgmental Biases

Impression Management

Competitive Irrationality

Integration