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.     

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.     

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.     

Looking forward and looking back: integrating completion and sunk-cost effects within an escalation-of-commitment progress decision

Currently, there are 2 conflicting frameworks with which to understand why decision makers might escalate their commitment to a previously chosen course of action: sunk costs and project completion. The author proposes that sunk costs and need to complete exert simultaneous pressures, both independent and interactive, on a decision maker's level of commitment. The responses of 340 participants were analyzed and supported a complementary relationship between the 2 predictors. In addition, sunk costs demonstrated a curvilinear influence on commitment and an interaction with level of completion that supported a Level of Completion x Sunk Cost moderation model. (A marginal utility model was not supported.) Results are discussed in terms of their relevance toward offering a complementary view of 2 potential antecedents to a decision maker's propensity to escalate his or her commitment to a previously chosen course of action.     

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.     

A query theory account of the effect of memory retrieval on the sunk cost bias

The sunk cost bias occurs when individuals continue to invest in the same option when better alternatives are available. Many researchers believe that this bias is due to overemphasizing the past investment over the (missed) opportunities offered by alternatives. As an alternative or complement to this view, we show that memory retrieval and attention play important roles in the sunk cost bias. In two experiments, individuals generated more reasons for pursuing the invested option than for an alternative; they generated those reasons earlier in a sequence of reasons; and these effects increased as the individuals made progress toward attaining the reward yielded by the invested option. Associated with these effects, individuals perceived an increasingly wide gap in value between the invested and alternative options as they progressed toward the goal, thereby creating the sunk cost bias. Forcing individuals to reverse the order in which they generated reasons for the invested and alternative options reduced the bias. [corrected]     

Erratum to: A query theory account of the effect of memory retrieval on the sunk cost bias

The sunk cost bias occurs when individuals continue to invest in the same option when better alternatives are available. Many researchers believe that this bias is due to overemphasizing the past investment over the (missed) opportunities offered by alternatives. As an alternative or complement to this view, we show that memory retrieval and attention play important roles in the sunk cost bias. In two experiments, individuals generated more reasons for pursuing the invested option than for an alternative; they generated those reasons earlier in a sequence of reasons; and these effects increased as the individuals made progress toward attaining the reward yielded by the invested option. Associated with these effects, individuals perceived an increasingly wide gap in value between the invested and alternative options as they progressed toward the goal, thereby creating the sunk cost bias. Forcing individuals to reverse the order in which they generated reasons for the invested and alternative options reduced the bias.     

Directing idea generation using brainstorming with specific novelty goals

In a field experiment with students, we show that a specific, difficult novelty goal, whether presented alone or in conjunction with brainstorming rules, improves novelty and creativity in individuals’ idea generation relative to brainstorming rules alone when goal commitment is high. Because creativity is often correlated with idea quantity in brainstorming studies, we controlled for idea quantity in order to demonstrate that the improvement is not due to changes in the number of ideas generated. These findings suggest that specific, difficult goals beyond quantity can improve idea generation. We also separately measured practicality and effectiveness of participants’ ideas. The results of these analyses suggest that goal commitment might be an important determinant of usefulness, and deserves additional attention in studies of idea generation.     

The effects of mortality salience on escalation of commitment

Based on propositions derived from terror management theory (TMT), the current study proposes that people who are reminded of their mortality exhibit a higher degree of self-justification behavior to maintain their self-esteem. For this reason, they could be expected to stick with their previous decisions and invest an increasing amount of resources in those decisions, despite the fact that negative feedback has clearly indicated that they might be on a course toward failure (i.e., "escalation of commitment"). Our experiment showed that people who were reminded of their mortality were more likely to escalate their level of commitment by maintaining their current course of action. Two imaginary scenarios were tested. One of the scenarios involved deciding whether to send additional troops into the battlefield when previous attempts had failed; the other involved deciding whether to continue developing an anti-radar fighter plane when the enemy had already developed a device to detect it. The results supported our hypothesis that mortality salience increases the tendency to escalate one's level of commitment.     

Blind to Bias? Young Children Do Not Anticipate that Sunk Costs Lead to Irrational Choices

Young children anticipate that others act rationally in light of their beliefs and desires, and environmental constraints. However, little is known about whether children anticipate others’ irrational choices. We investigated young children's ability to predict that sunk costs can lead to irrational choices. Across four experiments, 5- to 6-year-olds (total N = 185) and adults (total N = 117) judged which of two identical objects an agent would keep, one obtained at a high cost or one obtained at a low cost. In Experiment 1, adults predicted that the agent would choose the high-cost object over the low-cost one, whereas children responded at chance. Experiment 2 replicated these findings in children, but also included another condition which showed they were sensitive to future costs. They predicted that an agent would be more likely to seek out a low-cost item than a high-cost item. Experiments 3 and 4 then found that children do not anticipate the sunk cost bias in first person scenarios, or in interpersonal sunk cost scenarios, where costs are sunk by others. Taken together, our findings suggest that young children may struggle to understand and predict irrational behavior. The findings also reveal an asymmetry between how they consider sunk costs and future costs in understanding actions. We propose that this asymmetry might arise because children do not consider sunk costs as wasted.     

Eyes on the prize: The longitudinal benefits of goal focus on progress toward a weight loss goal

Past research suggests that focusing on what has not yet been accomplished (goal focus) signals a lack of progress towards one's high commitment goals and inspires greater motivation than does focusing on what has already been accomplished (accomplishment focus). The present investigation extends this research to a longitudinal, important domain by exploring the consequences of focusing on one's goals versus accomplishments when pursuing a weight loss goal. Participants were tracked over the course of a 12-week weight loss program that utilized weekly group discussions and a companion website to direct participants' focus toward their end weight loss goal or toward what they had already achieved. Goal-focused participants reported higher levels of commitment to their goal and, ultimately, lost more weight than did accomplishment-focused and no focus control participants. Accomplishment-focused participants did not differ from controls on any measure.     

Escalate shamefully,de‐escalate angrily or gratefully: The influence of discrete emotions on escalation of commitment

Decision makers often tend to escalate their commitment when faced with a dilemma of whether to continue a losing course of action. Researchers recently began to investigate the influence of discrete emotions on this decision tendency. However, this work has mainly focused on negative emotions and rarely considered positive emotions, to say nothing of comparing the effects of both of them simultaneously. The current study addresses this need by presenting the results of three experiments that examined the effects of four emotions of both positive and negative valences in escalation situations. Experiment 1 investigated the relationships of three trait emotions (hope, shame, and anger) and escalation of commitment. Experiments 2 and 3 examined the effects of three induced emotions (anger, shame, and gratitude) on escalation of commitment in a student sample and an employee sample, respectively. The results revealed that the effects of discrete emotions in escalation situations are mainly due to their associated differences on the appraisal dimension of responsibility that is related to escalation situations rather than their valence. The theoretical and practical implications are discussed.     

The Effect of Goal Difficulty on Escalation of Commitment

Escalation of commitment to a failing course of action is a problem in behavioral decision making that occurs across a wide range of social contexts. In this research, we show that examining escalation of commitment from a goal setting theory perspective provides fresh insights into how goal difficulty influences escalation of commitment. Specifically, through a series of two experiments, we found a curvilinear relationship between goal difficulty and post‐feedback goal commitment, which was mediated by valence and expectancy associated with goal attainment. In turn, it is commitment to goals that leads individuals to continue a previous course of action despite negative feedback. Copyright © 2014 John Wiley & Sons, Ltd.     

Too Close to Quit: The Role of Project Completion in Maintaining Commitment1

Conlon and Garland (1993) demonstrated that information about the degree of project completion, as compared with information about sunk costs, seemed to be the driving force behind continued investment in an R&D project. In the present paper, we replicate and extend this work. In studies with experienced bank managers, Chinese graduate students, and advanced-level MBA students, we find overwhelming support for the importance of project completion on investment intentions, with no indication of typical sunk cost effects. We argue that our results support a goal substitution explanation for many escalation phenomena where, as progress moves forward on a project, completion of the project itself takes increasing precedence over other goals (e. g., economic profit) that may have been more salient at the time the project was initiated.     

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.     

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.     

Sunk cost of local elected representatives in situation of fiscal competition: An example of escalating commitment

Introduction

Competition between French local communities to build infrastructures to attract enterprises and residents could sometimes result in irrational public spending.

Stuck in the middle: the psychophysics of goal pursuit

The classic goal-gradient hypothesis posits that motivation to reach a goal increases monotonically with proximity to the desired end state. However, we argue that this is not always the case. In this article, we show that motivation to engage in goal-consistent behavior can be higher when people are either far from or close to the end state and lower when they are about halfway to the end state. We propose a psychophysical explanation for this tendency to get "stuck in the middle." Building on the assumption that motivation is influenced by the perceived marginal value of progress toward the goal, we show that the shape of the goal gradient varies depending on whether an individual monitors progress in terms of distance from the initial state or from the desired end state. Our psychophysical model of goal pursuit predicts a previously undiscovered nonmonotonic gradient, as well as two monotonic gradients.