Also known as a commitment bias, escalation of commitment refers to the irrational behavior of investing additional resources in a failing project. Even though it may seem obvious to outsiders that your business proposal has died, you might use all your time, energy and money to try to save it. Why can they see what you can't? The theory of commitment bias explores this phenomenon.
Savvy entrepreneurs know that resources remain an important factor in business success, but without a strategy and a strong selling proposition, no business venture can get off the ground, even with all the money in the world. This is a rational idea that seems to go out the window when it's our beloved project on the line. When we think, "This can work if I increase the budget and work long hours into the night," we're grasping at straws and displaying escalation of commitment.
Interestingly enough, the escalation of commitment theory proposes that we're more likely to dump resources into a failing venture if we've already spent a lot of time, energy and money on it. In other words, the more resources that we've already injected into a business, the more likely we are to continue to invest in it even as it sinks. It's safe to say that humans, in general, don't handle rejection or failure very well. We do anything we can to avoid acknowledging it.
A prevailing theory about escalation of commitment points to our desire to be judged positively by others as a possible cause for this phenomenon. We don't want to admit that we made a poor decision, wasted our time or otherwise seem incompetent and incapable. We value routine and consistency, and it's easier to cling to these factors than to abandon ship.
Sometimes we believe we're following a logical course of action by continuing to invest resources in a failing project. After all, if we "give up", then the previous investments will have been a complete waste. But if we push ahead and remain hopeful that our efforts will prevail, then the cumulative resources will finally pay off. Psychologists call this the "sunk cost fallacy."
Our perceptions and judgments can also cause us to fail to realize that we're following a poor course of action. We get tunnel vision from being so close to the situation. We don't see any value in an alternative, so we keep doing what we've always done.
The business world holds many examples of escalation of commitment in action. These include staying in a job that provides poor satisfaction, financing projects showing little return on investment and getting into bidding wars. However, escalation of commitment also occurs in our everyday lives, gaining a foothold in struggling relationships or even fueling support for charities that don't have a proven selling proposition.
A classic example of escalation of commitment involves staying in a job we despise. To an outsider, the situation may seem painfully obvious: quit your job and find a more rewarding career. But when we're in this particular situation, we experience a commitment bias.
We think that we might enjoy our job better if we do this or do that. We don't want to throw away the years of studying, training and experience that brought us to this position. And we don't think working for a different company could really provide a better situation. Plus, we know that potential employers don't like to see a resume in which we've clearly bounced from job to job.
So, we just grit our teeth and bear with it. We're trapped by our perceptions, by our desire to manage other people's impressions or judgments and other irrational thoughts that blind us and send us into a pattern of escalation of commitment.
Sometimes an entire group of people can display escalation of commitment together. Think about a struggling department within your company. If you called the department together for a meeting and said, "What should we do about the project you've spent a year working on that's only showing 30% ROI?" rarely would anyone say, "Let's pull the plug and forget about it."
What's far more likely to happen is that everyone rallies together to offer up solutions. Perhaps they need to hire a new employee or invest in a new computer program. They'll certainly always need more money. "If only we had ..." is a common phrase heard in meetings when escalation of commitment comes knocking.
What this means for you as a business owner is that all projects and investments should be routinely evaluated by someone who hasn't dedicated any time or money toward the project. An unbiased reviewer (or panel of reviewers) is far more likely to make rational decisions than the team at the heart of the project. Even when we're aware that we're under the influence of commitment bias, it remains very difficult to take a rational view of the situation. Escalation of commitment can be minimized by ensuring that an outside perspective is always present.
A bidding war represents another example of escalation of commitment at work in the business world. For seemingly no other reason than to appear unwavering and consistent, bidders can get into irrational competitions at auction and grossly overstep their initial planned budgets.
Imagine spending hundreds of dollars more for something just because you didn't want to back down and let your previous bidding efforts go to waste. Now imagine spending millions of dollars more. That's exactly what happened to Robert Campeau, who got into a bidding war and spent $600 million over value to purchase Bloomingdale's.
Escalation of commitment does not only occur in the business world, but also in our personal lives and in our communities. For example, escalation of commitment can cause us to stay in unhappy relationships in the same way that we stay in a job that we hate. Dating and establishing a trusting, loving relationship takes a lot of work, and we hate the idea of starting at square one. If you've ever thought, "Maybe if I was more attractive, this relationship would work," be wary: you're experiencing escalation of commitment.
On the other hand, some charities exist that receive plenty of public donations and support but have few results to show despite those resources. For example, the anti-drug program DARE is based on the idea that teaching kids to "just say no" when offered drugs can curb drug use, but evidence suggests this does not work. However, people like the concept of anti-drug education and continue to funnel resources toward these efforts regardless.
Escalation of commitment occurs because we don't always think rationally. We're driven by emotion and ego far more often than we care to admit. Being aware of the prevalence of escalation of commitment can help to curtail it in your business. Train your employees to recognize its presence too, and the damage it causes may diminish.