On a number of occasions I have spent time discussing reports highlighting deficiencies in the way governments execute large infrastructure projects (see, for example, Ombudsman findings regarding Victorian Public ICT Projects and the Commission of Inquiry regarding the Health Services Payroll project).
The underlying question that arises from reviewing these damning reports is “Why did they not stop the project? Did they not realize that they are throwing good money after bad?”.
We can argue, and some indeed do, that the people responsible for these projects were all incompetent, lacking basic professionalism and integrity. And, while it is tempting to take this view – as, at least at the animalistic level, it seems to satisfy our need to extract revenge at these people who have caused us so much grief, and wasted our hard earned money – it nevertheless fails to provide a sustainable theory as to why these things happen so often and at such great scale.
In today’s post I would like to focus on one possible factor – The Escalation of Commitment – that could, at least partially, explain this phenomenon.
To facilitate this discussion I will make use of the following two studies:
- Escalation of Commitment, by Theresa F. Kelly and Katherine L. Milkman; Wharton University; and
Escalation of Commitment: Patterns of Retrospective Rationality, by Fred C. Lunenburg; Sam Houston State University
Management scholars have documented a tendency – referred to as Escalation of Commitment – of decision makers to escalate commitment to previously selected courses of action when objective evidence suggests that staying the course is unwise. In these situations, decision makers often feel they have invested too much to quit and make the errant decision to “stick to their guns”.
Escalation of commitment can be explained by the following factors:
- Self-Justification Theory – Feeling personally responsible for an investment that turns sour intensifies the threat associated with failure and increases a decision maker’s motivation to justify the original choice oneself.
- Confirmation Bias – After committing to a choice, people are far more likely to notice and overweight evidence that supports their decision and ignore and underweight evidence that does not
- Loss Aversion – Past research on prospect theory has demonstrated that the disutility caused by losses is greater than the utility obtained from equivalent gains
- Impression Management – The outcome of an investment is rarely free from external scrutiny, and a decision maker may escalate commitment to the original investment to avoid admitting to others that the venture was a failure or that the decision was flawed
Like most other cognitive biases, knowing about them can help reduce, though not necessarily eliminate, their likelihood of appearing. The research suggests several prescriptions for avoiding escalation of commitment, (with the source/aggravator in parentheses):
- Actively seek disconfirming information about a chosen alternative (conformation bias).
- Reframe losses as gains to prevent risk-seeking behavior (loss aversion).
- Structure incentives so that decision makers are not punished for inconsistency (impression management).
- Hand off decisions about whether to commit more resources to an investment to new decision makers (personal responsibility).
- Be careful not to consider expended resources when making decisions (sunk costs).
- Make sure decision makers are frequently reminded of the goals of the investment (proximity to completion).
Escalation of commitment is the tendency of decision makers to continue to invest time, money, or effort into a bad decision or unproductive course of action. The expression „throwing good money after bad” because they have “too much invested to quit” captures the essence of this common decision-making error…
Many organizations have suffered large losses, because a manager was determined to prove his original decision was correct by continuing to commit resources to a failing course of action.
The decision making guru, James G. March, put it this way: “Now that I have made my decision, I need to find good reasons for it.”
Think about it!