cepp_logo5.gif (13296 bytes)


newspaper.gif (867 bytes)

<Back to Articles Page

The following article was written by Coleman Patterson and appeared in the Business section of the Abilene Reporter-News.

eBayers, beware the tempting ‘escalation of commitment’ trap, March 23, 2008, 2C.

Experienced eBay buyers respect and understand the bidding process.  Bidders on eBay are instructed to enter the highest amount that they are willing to pay for an item when placing their bids.  After deciding upon and entering that amount, the most rational thing for a bidder to do is to wait for the auction to end before checking to learn the outcome of the offer.  One of the worst things to do is continually check on the status of the status of the auction and get into a bidding war with other bidders.

It is very tempting to raise a maximum bid several dollars when you find out that someone else has outbid your maximum offer.  If you were originally dedicated to spending no more than $40 on an item, a new maximum bid of $42 is only two dollars more.  And when competing bidders raise the price to $44, it only seems logical to invest three more dollars and push the price to $45.  By the time the auction ends, a bidder who was originally willing to invest no more than $40 may find that he has spent considerably more. 

Escalation of Commitment is the name given to the process of making decisions in the pursuit of a course of action that seem rational based on previous actions, but in reality are quite irrational.  Once invested in a course of action, it many times seems wiser to throw more investment into the action than cutting losses and moving on to something more profitable.  The bidder who has surpassed her original and well-reasoned maximum bid amount many times rationalizes making higher bids in terms of what will be lost if she does not increase her bid and reasons that another slightly higher bid is justified because the auction can be won with just a few dollars more.

Organizations are susceptible to the pitfalls of escalation of commitment.   They sometimes throw money and resources after unprofitable ventures because they have irrational senses of gain and loss.  They will sometimes invest more into a failing course of action in the pursuit of success than if they had taken an earlier loss and moved on to another venture.  Pouring more money into promoting an unprofitable product line rather than dumping it, retaining unproductive employees instead of letting them go, repairing and maintaining defective equipment rather than scrapping it and buying new equipment, spending more time and effort developing strategies to make unproductive activities profitable rather than starting over with new options, and sinking additional money into over-budget building projects are all forms of escalation of commitment. 

Decision makers need to look at what the option will yield in the future rather than looking at what has been invested in the action in the past.  Sometimes the best course of action is to stop, turn, and head in a new direction.  If organizational decision makers are so dedicated to success at any cost, they may find that success ultimately costs them everything. 

<Back to Articles Page

reporternews.gif (5314 bytes)

2006, 2007, 2008  Coleman Patterson, All Rights Reserved