Escalation of commitment occurs because of psychological factors. Unilateral escalation paradigm is triggered by perceptual and judgemental biases, as well as impression management. Competitive escalation paradigm is explained by competitive irrationality.
Perception of performance may be biased by your initial decision. We ignore information that contradicts initial judgment. Human beings tend to notice positive information rather than negative. We pay more attention to confirming than disconfirming evidence and filter information selectively (to maintain commitment to the course of action).
Cautious decision makers should use corrective procedures. Search vigilantly for disconfiming information to balance out the confirming information that individuals intuitively seek. Establish monitoring systems that help to check out perceptions before making subsequent judgements. For instance: ask an objective outsider to evaluate the decision and be open to disconfirming evidence.
We can teach ourselves to look for disconfirming information. Consider the probability that we may be vulnerable to escalating commitment before even entering the situation. Consider a hypothetical situation where you escalated commitment in an auction and experience a bad outcome.
Any loss from an initial investment will systematically distort our judgement toward continuing the previously selected course of action. The logic lies in the framing concepts. Individuals tend to be risk averse to positively framed problems and risk seeking to negatively framed problems. For instance: we continue to gamble on risky investments with ever-larger sums of money, hoping to dig out of the hop that we had created. A rational decision maker should evaluate potential consequences from different reference points.
Individuals tend to manage impression of others. They want to prove that earlier decision was right and announce this in public. We do not want to admit failure and try to appear consistent to others. Increasing commitment to our previous actions is one sign of consistency. Our society perceives administrators whose actions are consisted as better leaders in comparison to those who change their behaviour or opinions (Staw and Ross, 1980). Unwillingness to revise the position regardless the unpopularity or impracticality of the decision is publicly perceived as evidence of strength.
A successful organisation, one that seeks an effective decision making process, should replace systems that encourage impression management with those that reward good decisions. To do this, managers must convey that impression management at the expense of high-quality decisions will not be tolerated. They should match employees values to organisation by modifying reward systems. Reward should not be based solely on results but on decision process. Employes should be encouraged to make best possible decisions at different stages.
Competitive irrationality is defined as situation in which two parties engage in an activity that is clearly irrational in terms of the expected outcomes to both sides. However, it is difficult to identify specific irrational actions by either party.
Escalation trap (continuing to bid) depends on estimation of the likelihood that the other party will quit. Many situations may look like opportunities but prove to be traps when you have fully considered the likely actions of others. The most dangerous trap is competitive motive to “win” rather than seek out gains. Winning involves betting others in the competition. When two parties become determined to beat the other side, the stage is set for an escalatory battle in which both loose.
Bazerman, M.H. and Moore, D.A., 1994. Judgment in managerial decision making (p. 226). New York: Wiley.