BazermanMoore

102 Chapter 6: The Escalation of Commitment
deserve. By now, you have been with the organization for several years and would
lose numerous benefits, including stock options, if you decided to leave. You are in
your late thirties and feel you have invested your best years with this company. Do
you quit?
You work for a private equity firm and make a decision to invest $2 million in a
start-up venture. You personally argued for this investment against some skeptics
in your firm. One year later, the CEO from the start-up appears in your office and
says: ‘‘I have bad news, and I have good news. The bad news is that the company is
running out of cash. Without additional funds, we will definitely go under, and you
will lose the $2 million. The good news is that I am quite confident that if you
invest another $1 million, we can work out the bugs in our invention and still be a
great success.’’ Do you invest the additional $1 million?
Although each of these decisions represents a very different situation, they share a
number of common elements. In each case, you have to make a decision as a result of a
previous decision. You hired the employee. You took the job. You made the investment.
In each case, you have invested a great deal of time, effort, and resources in your selected
course of action, and now things are not working out as you had hoped.
We frequently face similar decisions of varying importance. Should you sink more
money into that old wreck of a car? How long should you stay on hold with an airline
before hanging up? When the price of a stock that you own goes down, how far down
should you let it go before selling it? Inertia frequently leads us to continue on our
previously selected course of action, or we may feel that we have ‘‘invested too much to
quit.’’ How do you know when to quit? At what point does continuing on the same
course of action become irrational? And why, when such behavior becomes irrational,
is it so common? These are the central questions of this chapter.
Although we are taught from an early age to ‘‘try, try again,’’ the fact is that misdirected
persistence can lead you to waste a great deal of time, energy, and money. However,
directed persistence can lead to commensurate payoffs. The key to making
intelligent decisions in dynamic contexts such as those presented above is being able to
discriminate between situations in which persistence will pay off and situations in
which it will not.
A variety of authors from different fields have presented ideas relevant to the three
hypothetical situations described above, using a number of different terms (such as
escalation, entrapment, andpersistence) to describe commitment to a previously selected
course of action. Without presenting the diversity of definitions used in the literature,
we define nonrational escalation in this chapter as the degree to which an
individual escalates commitment to a previously selected course of action to a point
beyond that which a rational model of decision making would prescribe.
Accountants and economists provide insight into how to handle these scenarios.
Experts from these areas tell us that in such situations, we need to recognize that the
time and expenses that we have already invested are ‘‘sunk costs.’’ That is, these costs
are historical, irrecoverable, and should not be considered in any future course of action.
Our reference point for action should be our current state, and we should