Many managerial decisions concern a series of choices rather than isolated decisions. We are prone to a particular type of bias when approaching decisions serially. Individuals tend to escalate commitment. This happens in an unconscious level, however it is possible to eliminate this non-rational behaviour.
Assume you hired a manager and the early reports say he is not performing well. Should you fire him or give it another chance? You have invested a fair amount of time and money into his training. You are wondering perhaps he is in the process of learning. Consequently, you decide to invest in his success a bit longer and provide additional resources to help him achieve the set goals. After two months, he is still not performing well. When should you stop investing?
Individuals make a decision as a result of a previous decision. As you have invested a great deal of time, effort and resources in your selected course of action, inertia leads you to continue. We feel we have invested too much to quit. How do you know when to quit? At what point does decision become irrational? Why irrational decisions are so common?
Misdirected persistence can lead us to waste time, energy and money. Directed persistence can lead to payoffs. The key to making intelligent decisions is dynamic contexts. We should be able to discriminate between situation in which persistence will pay off and those in which it will not.
We need to recognise that the time and expenses that we have already invested are sunk costs. There are historical and irrecoverable costs that should not be considered in any future course of action.
Reference point for action should be current state and we should consider all alternative courses of action by eliminating only the future costs and benefits associated with each alternative. Key decision involves future cost and benefits of existing v.s. future costs and benefits.
Decision makers who commit themselves to a particular course of action tend to make subsequent decisions that continue commitment beyond the level of suggested rationality. They allocate resources in a way that justifies previous commitments — whether or not those initial decisions now appear valid.
Dealing with escalation of commitment
Each factor triggers independently but more often they work together. In order to reduce escalation, we must attack each cause at individual and organisational level.
Managers should be open to drop commitment and shift to another course of action if the first plan does not work. They must constantly reassess rationality of the future commitments and learn to identify failures early.
However, one should also be aware of the importance to maintain relationships. By ending commitment, you may lose out all future benefits of the relationship. Maintaining relationship provides you with options as you move forward. The key is to make decisions without regard to sunk costs and instead with a focus on the future benefits and cost of your choices.
Bazerman, M.H. and Moore, D.A., 1994. Judgment in managerial decision making (p. 226). New York: Wiley.