Behavioral Causality Orientations and Investment Decisions Following Negative Feedback

Individual differences in the locus of causality for behavior are seldom considered in tests of regulatory events (e. g., feedback and coercion). This study examined the relationship between Deci and Ryan's (1985a) causality orientation constructs and decision makers' behavioral intention responses to negative feedback following an initial decision. A laboratory experiment involved 98 Singaporean business students in a commitment escalation context in which sunk costs for an initial investment failure could be recovered by reinvesting in that prospect in preference to selecting an alternative that had previously performed better. Consistent with various theories of the escalation effect, in which subjects responsible for prior negative outcomes tend to reinvest in the initially chosen project, control orientation was positively associated with reinvestment and impersonal orientation was negatively related to reinvestment. The influence of personality on reinvestment/withdrawal behavior was moderated by the experimental condition of responsibility for the initial sunk cost. We discuss the implications of these findings for the construct validity of the causality orientations, the role of personality in commitment escalation, and the important role that individual differences in perceptions of regulatory events may play in determining behavior.     

Prospect Theory Predictions When Escalation Is Not the Only Chance to Recover Sunk Costs

Two experiments tested the effect of risk of alternative investment opportunities on decision behavior in an escalation context. In the first experiment (n = 170), the risk of the reinvestment option, which had been unsuccessful and incurred a sunk cost, was held equal to that of an alternative investment project. Responsibility for the previous decision was manipulated between these subjects. Subjects were required to choose between the reinvestment option and the alternative. Responsible subjects demonstrated classic reinvestment (escalation) tendencies, and nonresponsible subjects exhibited a significant tendency to avoid reinvestment. Subjects in the second experiment (n = 195) completed the same decision task and were also assigned to high and low responsibility conditions. In this experiment the risk of investing further in a previously chosen project, relative to the risk of the alternative project, was manipulated. Those subjects who were responsible for the first decision (a) demonstrated no preference for or against continued pursuit of the initial project (i.e., there was no escalation tendency) and (b) preferred the less risky of the second investments, regardless of whether it was or was not the initially chosen project. Nonresponsible subjects showed no risk preference or proclivity for reinvestment. The results of these experiments suggest that salient information concerning relative risk dominates the effect of prior performance information when alternative investments are considered. We discuss the implications of these findings for decision theory and for methodology in commitment escalation research.     

Biased information processing in the escalation paradigm: information search and information evaluation as potential mediators of escalating commitment

Escalation of commitment denotes decision makers' increased reinvestment of resources in a losing course of action. Despite the relevance of this topic, little is known about how information is processed in escalation situations, that is, whether decision makers who receive negative outcome feedback on their initial decision search for and/or process information biasedly and whether these biases contribute to escalating commitment. Contrary to a widely cited study by E. J. Conlon and J. M. Parks (1987), in 3 experiments, the authors found that biases do not occur on the level of information search. Neither in a direct replication and extension of the original study with largely increased test power (Experiment 1) nor under methodologically improved conditions (Experiments 2 and 3) did decision makers responsible for failure differ from nonresponsible decision makers with regards to information search, and no selective search for information supporting the initial decision or voting for further reinvestment was observed. However, Experiments 3 and 4 show that the evaluation of the previously sought information is biased among participants who were responsible for initiating the course of action. Mediation analyses show that this evaluation bias in favor of reinvestment partially mediated the responsibility effect on escalation of commitment.     

Justification and the Processing of Information

This study explores, within the context of escalating commitment, how ambiguous information affects decision making. By analyzing subjects' looking times and allocation decisions, we examined the process by which individuals abstract and use information to arrive at their decisions. We found that subjects spent more time processing ambiguous information than they did either purely optimistic or purely pessimistic information. This tendency to process ambiguous information longer increased when the decision maker was not exonerated from blame for the failure of an original decision; presented with ambiguous information, nonex-onerated subjects also made smaller allocations than did exonerated subjects. In this study, the predominant effect of felt responsibility on allocations was withdrawal rather than escalation. Our results suggest that the ambiguity of information about the future plays an important role in escalation and that the combination of responsibility and failure may affect allocations only when the prospective information is ambiguous.     

Escalation of commitment with transparent future outcomes

A frequent case of irrational decision making is the tendency to escalate commitment to a chosen course of action after unsuccessful prior investments of money, effort, or time (sunk costs). In previous research it is argued that escalation does not occur when future outcomes and alternative investments are transparent. Inconsistent with this argument, in an experiment in which undergraduates were presented fictitious investment problems with sunk costs, escalation was demonstrated when full information was given about investment alternatives and estimates of future returns. Thus, it is indicated that people may escalate despite knowing that it will not make them economically better off. A more comprehensive understanding of escalation requires disentangling people's noneconomic reasons for escalation.     

Workplace Expression of Emotions and Escalation of Commitment1

These studies examined the effects of expressions of anger and guilt in the workplace on escalation of commitment. Study 1 examined the relationship between employees' reports of coworkers' emotion expressions and continued investment in a poorly performing subordinate. Study 2 tested the effects of leader expressions of anger and guilt on continued investment in a failing project. Results of both studies demonstrate that expressions of anger lead to greater escalation of commitment, while expressions of guilt lead to de‐escalation. Experimental results indicate that the effects of emotion expressions on escalation are strongest when individuals are collectively responsible for the initial decision, a finding that was mediated by feelings of psychological safety.     

Computers and commitment to a public management decision: An experiment

Based on results of an experiment, hypotheses are tested concerning the effects of computer use on decision commitment. The experiment required subjects to make an adoption decision regarding a hypothetical government agency's innovation. Subjects could choose from a variety of information sets, some computer based, some not, before making the decision. After their decision the subjects were given “new evidence” that contradicted their initial position. Two experimental treatments included more difficult access to the computer-based information and higher cost for the computer-based information. Results indicate that access difficulty diminishes confidence in decisions and leads to lesser commitment. However, the cost of the computer information seems to have little bearing on decision commitment. Barry Bozeman is director of the Technology and Information Policy Program of the Maxwell School of Public Affairs, Syracuse University, Syracuse NY 13244-4010. There he is professor of public policy and administration and affiliate professor of engineering. His research has focused on organization theory and public management, science and technology policy, and the use of technical information in decision-making. R.F. Shangraw, Jr. is vice president of Independent Project Analysis, Inc., Great Falls, Virginia. Previously, he was assistant professor of public administration at Syracuse University. His research interests include information management, decision-making, and public policy applications of expert systems.     

Optimism as modifier of escalation of commitment

To study whether optimism-pessimism modifies escalation of commitment, 52 undergraduates were told that they had made an unsuccessful investment, then they chose to continue or discontinue this investment. Optimism about future returns was induced in one group by varying the probability of a successful outcome from an initial low to medium, pessimism was induced in another group by varying this probability from an initial high to medium. Supporting the assumption of the manipulation, the results showed that optimistic participants preferred to continue investments whereas pessimistic participants preferred not to. As predicted, when the sunk cost increased, optimism led to escalation of commitment, whereas pessimism led to de-escalation of commitment. These effects were strengthened when probability of a successful outcome was ambiguous.     

Towards a competitive arousal model of decision-making: A study of auction fever in live and Internet auctions

In 1999, Chicago sponsored a public art exhibit of over 300 life-sized fiberglass cows that culminated in 140 Internet and live, in-person auctions. Collectively, the cows sold for almost seven times their initial estimates. These unexpectedly high final prices provided the impetus for a model of decision-making, “competitive arousal,” which focuses on how diverse factors such as rivalry, social facilitation, time pressure, and/or the uniqueness of being first can fuel arousal, which then impairs decision-making. In Study 1, live and Internet bidding and survey data from 21 auctions throughout North America tested the model’s predictions, as well as hypotheses derived from rational choice and escalation of commitment models. Analyses provided considerable support for the competitive arousal and escalation models, and no support for rational choice predictions. Study 2 was a laboratory experiment that investigated the similarities and differences between escalation and competitive arousal, finding again that both can result in overbidding. The discussion focuses on the implications of these findings and on the broader issue of competitive arousal and escalation and their impact on decision-making.     

The effect of decision risk and project stage on escalation of commitment

We investigate the joint effects of decision risk and the stage of project completion on escalation of commitment. In two experiments, we demonstrate that the effect of decision risk is moderated by project stage such that the decision risk has the strongest effect on escalation of commitment at the intermediate stage of project completion. This is due to the dynamic influences underlying escalation of commitment. Whereas the need for project information influences resource commitment at the initial stage of a project, the need for project completion affects resource allocation at the terminal stage. In contrast, motivation to commit resources is disproportionately low at the intermediate stage since both the need for project information and the need for project completion are relatively weak. As such, the decision to commit resources is most sensitive to the moderating effect of decision risk when the project is about half complete.     

Public justification and investment in failing projects: the moderating effect of optimistic outcome expectations

Public justification can have both desirable and undesirable effects. One dysfunctional consequence demonstrated via laboratory experiments is an increase in the escalation of commitment (i.e., public justification increases investment in failing projects). Based on survey data from 247 failed company projects, this study provides supporting evidence of the escalation‐increasing effect of public justification. Thus, the results support the external validity of prior findings. In addition, this paper hypothesizes and confirms a negative moderating effect of optimistic outcome expectations on the relation between public justification and investments. Specifically, for low optimistic outcome expectations, public justification increases investments in failing projects. In contrast, in cases of highly optimistic outcome expectations, public justification does not further increase investments in failing projects.     

In Search of the Underlying Mechanism of the Disposition Effect

Using comprehensive data from the Finnish stock market, we assess the explanatory value of the three most commonly cited explanations for the disposition effect: prospect theory, belief in mean reversion, and escalation of commitment. In general, the results provide evidence for the presence of the disposition effect. More importantly, the effect appears to be significantly more pronounced when investors are personally responsible for the initial investment decision. This finding suggests that investor behavior is influenced above all by self‐justificatory concerns, an interpretation that is consistent with the escalation of commitment‐based explanation of the disposition effect. Copyright © 2011 John Wiley & Sons, Ltd.     

A conceptualisation of task dimensions affecting escalation of commitment

People frequently continue an investment despite a negative outcome or sunk cost. Such irrational persistence in a losing course of action has been termed escalation of commitment. Although several explanations of escalation of commitment have been proposed, none of them accounts for all determinants that have been empirically demonstrated. Based on a review of previous research, a conceptualisation is introduced of how escalation of commitment is affected by 4 task dimensions: type and nontransparency of decision goal, nontransparency of sunk costs, time course of sunk costs, and accountability. A more inclusive theory that subsumes escalation of commitment is offered as an alternative that may be developed to account for the effects of the task dimensions.     

Escalation and De-escalation of Commitment in Response to Sunk Costs: The Role of Budgeting in Mental Accounting

Research has traditionally assumed that people increase investment (or "escalate commitment") in response to previous investments (sunk costs). This paper presents several demonstrations which show that people will incorrectly de-escalate investment in response to sunk costs. I propose that people set mental budgets to control their resource expenditures: they set a budget for a class of expenses and track their investments against their budget. A lab study with real monetary incentives shows support for de-escalation and supports a specific rule for how people set budgets - based on the breakeven of total costs and total benefits. The budgeting process suggests that people are only likely to escalate commitment when they fail to set a budget or when expenses are difficult to track. The later part of the paper organizes the previous literature on escalation around these processes and provides additional experiments to illustrate each point. For example, I argue that previous demonstrations that have shown errors of escalation exclusively involve "incidental" investments that are difficult to track. A study in the current paper shows that people are more willing to invest time than money to salvage a monetary sunk cost and more willing to invest money than time to salvage a sunk cost of time, even when the time and money investments are of equal value. The paper concludes by discussing the rationality of escalation and de-escalation.     

Retrospective reports of organizational commitment after Russian military downsizing

This paper assesses the accuracy of people's memories of attitudes and explores sources of errors in the recollection. We did a secondary analysis on a panel survey of the Russian Army's officer corps, conducted before and after its downsizing. The dependent measure was the discrepancy between Army officers' prospective and retrospective organizational commitment ratings made 18 months apart. We linked this discrepancy to the officers' sense of mastery and evaluations of job prospects across the two waves. In general, officers tended to overestimate their prior commitment to the Army. The amount of overestimation was positively related to both officers' initial level and the subsequent increase in mastery, but was negatively related to their perceived immediate job prospects. Possible mechanisms for the distortion and conceptual implications are discussed. Copyright © 2004 John Wiley & Sons, Ltd.     

Escalating Commitment in Individual and Group Decision Making: A Prospect Theory Approach

An explanation for escalating commitment based on prospect theory (Kahneman & Tversky, 1979) is extended to the group level of analysis. Hypotheses concerning the likelihood and degree of escalating commitment of individuals and groups were derived from the model and tested using six investment decision scenarios. Subjects responded to decision dilemmas in which substantial funds have been invested in a failing course of action. Subsequent investment would likely exacerbate although it could potentially reverse the situation. Consistent with hypotheses derived from the model, escalating commitment occurred in both individual and group decision making. Group decision making amplified trends apparent at the individual level in terms of the frequency with which escalation occurred and its severity. Although the results are consistent with a prospect-theory-based explanation of escalating commitment at two levels of analysis, support for the self-justification approach was also found. Motives for self-justification, however, do not appear to be a necessary condition for escalation to occur.     

The Effects of Feedback Equivocality on Escalation of Commitment: An Empirical Investigation of Decision Dilemma Theory1

The effects of feedback equivocality on escalation of commitment were examined in a laboratory study. Subjects had multiple opportunities to allocate money to market a software product. During the initial phase, subjects received feedback that was of either low or high equivocality. Half of the subjects in each equivocality level were given a standard by which to judge the feedback. In the second phase, all subjects received negative feedback. Consistent with Bowen's (1987) decision dilemma theory, subjects who received low equivocality feedback did not escalate allocations, and subjects who received high equivocal feedback escalated allocations. The presence of a standard or goal attenuated escalation. These results are consonant with a dynamic, temporally based account of escalation and are discussed in a synthesis of the literatures in behavior analysis, economics, forecasting, and psychology.     

Weighing the past and the future in decision making

Prior irreversible investments of money, time, or effort referred to as sunk costs frequently lead to decisions to continue a chosen course of action despite that this is irrational. With the aim of demonstrating that such escalation of commitment is a special case of a more general phenomenon, two experiments were carried out employing undergraduates as participants. Experiment 1 showed for fictitious personal and business investment scenarios that both prior losses and gains (sunk outcomes) affected choices to continue or discontinue the investment. In Experiment 2 the effect of sunk outcomes was reduced although not eliminated by a monetary bonus that in one condition depended on the future outcomes of the second gamble in two-stage gambles, in another condition on the future returns in personal investment scenarios. In support of a more inclusive theory subsuming escalation of commitment, the decisions were affected by both past and future outcomes and both gains and losses.     

Self-disclosure reciprocity,liking and the deviant

Conflicting predictions were derived from social exchange theory about the role of social attraction and the reciprocity norm on mutual self-disclosure in dyadic relationships. Sixty-six female subjects were exposed to one of three levels of disclosure input: conventional-low disclosure, conventional-high disclosure, or devianthigh disclosure. In support of the reciprocity norm prediction, willingness to disclose personal information was a positive function of the amount of disclosure input from another person, regardless of the degree of liking for the initial discloser.