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.
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