The Nonrational Escalation of Commitment 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”? 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? 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? 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? 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 Economists & accountant

Ignore the fact that you personally made the initial decision!!! How to avoid the non-rational tendency to escalation? Introduction

Staw’s study(1976): Introduction High- responsibility participant Low-responsibility participant Unsuccessful initial decision > Successful initial decision High- responsibility participantLow-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 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 Companies A, B & C Introduction Competitive Most frequent answer: $1.1 million If one of them makes an offer, competitive will start and the winner’s payment will be around $1.7 million which Each of them lose $0.5 million.

An auction on $20 bill The first and 2 nd highest bidder should pay $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 vs. Competitive Introduction Competitive In competition the desire to “win” serves an added motivation to escalate commitment Similarity: Difference:

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

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

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

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

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