A group or an individual is placed in a situation, where they have devoted their money, time, labor, or other resources, to the advancement of a potentially profitable endeavor, which then failed to provide a return on the investment. They can either terminate their involvement with the cause and allocate the resources to a different venture, or continue investing into the goal, hoping to turn the loss into a profit, and receive recompense for the efforts expanded, leading to commitment escalation.
Commitment escalation is a behavior pattern of groups and individuals, in which they continue increasingly investing resources into endeavors that do not provide a positive return, in hopes of changing the course of events and reversing the negative downsides, despite, growing expenses, and the irrationality of their predicament being apparent to an outside observer. Multiple theories are explaining these kinds of behaviors, including but not limited to the desire to justify prior actions to themselves and the social circle, inability to determine more viable alternatives, and stubborn reluctance to accept their previous investments as unrecoverable costs.
This literature review aims to evaluate what causes individuals and leaders, in particular, to devote themselves and their followers to a seemingly loss-making project, and how leaders can avoid the spiral of escalation and entrapment.
Literature review
Causes and consequences of commitment escalation
Leadership by definition requires calculated risk-taking to exploit new opportunities, achieve success in a competitive market, and successfully innovate.
By losing sight of the alternatives and not being able to accept a loss, the leader can become entrapped through uncontrollably escalating commitment.
The concept of commitment was studied as far back as 1960. In his research “Notes on the Concept of Commitment”, Howard, S. Becker studied the subject, and its principle causes (1960). Becker characterized the commitment to a goal as a result of “side bets” (extraneous actions) on the behalf of the person involved, which limit his choices in solving the problem. He defined commitment as consistent behavior, caused by prior actions or conditions which create external reasons for the person to follow a particular course of actions (side bets), and made in understanding that outside elements are influencing his decision. For example, having committed himself to a project, a leader may be weary of dropping out of it, in spite of accumulated losses if it means suffering a blow to his social standing, losing reputation, or having to accept responsibility for his mistakes.
These ideas were further developed in the research on sunk cost fallacy.
Sunk Cost Fallacy
The common thread of thinking is that the more resources have been allocated into a cause, the higher the chances of escalation are. The escalation of commitment as a consequence of sunk costs has been explored in Chapter 12, “Riding a Tiger: Escalation in Decision-Making” of the book “Art of Decision Making: Mirrors of Imagination, Masks of Fate” (Drummond, 2001). By citing various examples, the author showcases how individuals and organizations will continue to sink money and other resources into a lost cause. What is especially interesting, is that in this case time expended has a stronger impact on the person’s commitment than money.
There are also other factors that can contribute to the problem. They were covered extensively in the research paper “Escalation of Commitment” (Kelly & Milkman, 2013). While also examining the previous aspects of the issue, this work also provided more information on such rationales as the Self-Justification Theory, Confirmation Bias, Personal Responsibility, Exogenous Explanations for Failure, Group Decision Making, and Proximity to Completion.
Goal Distance
This factor can cause even the most rational leaders to exhibit escalation of commitment. As we have established, time expanded can be a form of sunk costs. Thus, the more time has been spent in pursuit of a goal, the harder it becomes to abandon said goal if it appears to be nearing completion. Rubin and Brockner have studied such entrapment in their study “Factors Affecting Entrapment in Waiting Situations: The Rosencrantz and Guildenstern Effect” (1975). They investigated the connection between proximity to the goal and escalation, and concluded that the more time has been spent on the goal, the greater is the need for the leader to act decisively, either to completely commit to the completion of the objective, or completely drop it to avoid further loss, consequently denying oneself the potential profits. The study also examines how the conditions of entrapment can be purposefully created to case the victim continued expense.
These ideas were given a renewed perspective in the research “The Effects of Goal Distance and Value in Escalation of Commitment” (Ting, 2011). By conducting a series of experiments and referring to previous works, Ting reaffirmed the assumption that not only the level of commitment increases with the amount of time investment and goal proximity but so do the expenses.
Tackling commitment escalation
Prevention of commitment escalation
It is vital that leaders are able to recognize symptoms of overcommitment, and remain cautious enough to avoid entrapped. The article “Know when to pull the plug” analyzed escalation, and provided advice on how to conduct self-assessment in order to differentiate between positive enthusiasm and entrepreneurship and unreasonable dedication (Staw, & Ross, 1987). The core idea here is for the leaders to have a concrete understanding of what constitutes project failure, and what is the maximum amount of resources that can be allocated to it before the project becomes a loss. It is also important to monitor that the project failure does not become a potential threat to the social and mental well-being of the leaders.
De-Escalation of Commitment
In their research “Promoting De-Escalation of Commitment: A Regulatory-Focus Perspective on Sunk Costs”, Molden and Hui studied techniques for de-escalation of commitment (2010). Through a series of exercises, they concluded that shifting the focus of leaders from avoiding loss, and towards achieving profits, they were able to mitigate the issue of overcommitment.
Conclusion
The literature reviewed establishes the dangers of commitment escalation, which has a potential to result in high losses to the businesses and the leaders personally, and can develop due to character traits which are traditionally seen as beneficial for a leader: personal responsibility, risk-taking, integrity, determination, and being success-oriented.
From scholarly and practitioner-oriented points of view, overcommitment is a very impressive and yet debilitating phenomenon, and warrants extensive study to further develop effective measures to prevent it and educate leaders on how to avoid it. This review analyzes the changes in perception of this problem, as well as its causes and inner mechanisms, and the current views on resolving it, and can become a substantial foundation for future research.
Personal Experience
The company I work in is one of the leaders in the global market of oil and gas products and service provision. It is an international company with over 100,000 employees in offices in 88 countries around the world. The principal strategy through which our company maintains its dominant positions is by expanding through acquisitions. This approach is further enhanced by the company’s solvency reserve being based on long-term success, which led to a series of major acquisitions and mergers.
One of these planned acquisitions was severely overpriced. However, the target company possessed a specialist tool, capable of performing complex drilling operations in the Gulf of Mexico. As a result, purchase of this company was seen as a prime opportunity for my company to expand its market share into the Gulf of Mexico region.
Since this was a major undertaking, I perceived this deal as a personal responsibility and wanted it to succeed, both to promote myself and the business.
However, the continuous, progressive drop in crude oil prices, which is affecting the company’s finances, has placed the acquisition decision under a more severe scrutiny than before. Despite the growing time and money investment, the company and I remained committed to this endeavor in anticipation that the prices would go up again. This course of action eventually had an adverse impact on the decision-making process about a more recent and less costly acquisition.
At this point, it became apparent that the company was trapped in an escalating commitment to this purchase, which was not only costing us valuable time but also, directly and indirectly, finances. It became necessary to determine if the profits from the anticipated expansion into the Gulf of Mexico out-weighted the sunk costs. Also, it was important to evaluate what were the foreseen consequences of the project’s failure further into the future, and how damaging they would be to the managing staff involved, the company, and me personally.
In order to investigate these questions, and to take measures to manage escalation and the resultant entrapment, an evaluation research into the decision-making processes on these acquisitions was initiated. The investigation and evaluation included interviews with chief organizational executives and senior managers, who were involved with the various strategic decision-making processes, as well as community meetings with select representatives of various employee groups for open discussion on the subject.
Ultimately, this investigation showed that the project had a number of signs of escalating commitment. The definition of its failure was vague from the start and did not take into account the extraneous expenses it could potentially incur. Due it its perceived importance, it made a number of managers and me, grow attached to it, and subconsciously place the goal of its completion above the purpose of gaining clear profit for the company.
Since at this point, my company and I had other commitments and side-bets, in the form of acquisitions and mergers which were affected by this project, it became necessary to make a decision on the future of the project. While the company had already made considerable investments into it, it was decided that rather than hope for the crude oil prices to begin rising again, and thus make the deal profitable, it would be let go. While the sunk costs were considerable, this decision probably saved the company much higher losses, both by stopping further investment into an acquisition which was not returning profits and by preventing it from jeopardizing other acquisitions.
I believe that by conducting the evaluation earlier and assessing the project for commitment escalation issues, this issue could have been resolved early and with less accumulated sunk cost.
References
Becker, H. S. (1960). Notes on the Concept of Commitment. American Journal of Sociology, 66(1), 32-40.
Drummond, H. (2001). Riding a Tiger: Escalation in Decision making. In The Art of Decision making: Mirrors of Imagination, Masks of Fate (pp. 172-195). Chichester: Wiley.
Kelly, T. F., & Milkman, K. L. (2013). Escalation of commitment. Encyclopedia of Management Theory, 257-260.
Molden, D. C., & Hui, C. M. (2010). Promoting De-Escalation of Commitment: A Regulatory-Focus Perspective on Sunk Costs. Psychological Science, 22(1), 8-12.
Rubin, J. Z., & Brockner, J. (1975). Factors affecting entrapment in waiting situations: The Rosencrantz and Guildenstern effect. Journal of Personality and Social Psychology, 31(6), 1054-1063.
Staw, B. M., & Ross, J. (1987). Knowing When to Pull the Plug. Harvard Business Review. Web.
Ting, H. (2011). The Effects of Goal Distance and Value in Escalation of Commitment. Current Psychology Curr Psychol, 30(1), 93-104.