Irrational escalation
Irrational escalation means continuing a commitment because of past investment despite evidence that the next investment is not justified. The relevant comparison is between future costs and benefits, not whether earlier spending can be recovered.
THE IDEA
Definition
Irrational escalation is a cognitive bias where people continue to invest in a decision despite new evidence suggesting it may be wrong, often due to their prior commitment of resources. It stems from the difficulty of disengaging from a course of action after having put time, money, or effort into it.
Mechanism
The bias arises because individuals seek to justify past investments or avoid perceived loss, leading to a cycle of escalating commitment. Instead of evaluating the situation objectively based on future benefits, they focus on past costs, causing irrational decision-making.
Example
- Auction Scenario: During an auction, two bidders get caught in a bidding war, each driven by the desire to win and the justification of previous bids, ultimately paying more than the item's value. This happens because they escalate their commitment based on prior rational bids.
When to use it
Negotiation: A buyer keeps raising their offer beyond their budget because they have already spent significant time and effort in the negotiation.
Business: A manager continues a failing project, thinking about the sunk costs, instead of reallocating resources to more promising ventures.
Auctions: Competitive bidders drive the price of an item far above its market value due to emotional escalation.
Personal investment: An individual holds onto a depreciating stock for too long because they don’t want to realize a loss on their initial investment.
FROM THEORY TO EVERYDAY LIFE
In practice
Auction Bidding War
Two bidders keep raising their offers because each feels committed to winning. In an ordinary auction, the winner may end up paying beyond the value they can justify. A higher bid is not irrational merely because it exceeds an initial plan; the problem is allowing prior commitment to replace a fresh assessment.
Failed Business Project
A company invested heavily in a new product line. As market signals indicate declining demand, management, rather than cutting losses, pours more money into the project to 'save' the initial investment, leading to greater financial loss.
A MOMENT TO REFLECT
Put it to work.
Can you recall a time when you continued with a decision because of what you had already invested? How did that turn out?
What strategies might help you recognize when you are irrationally escalating commitment in a personal or professional context?
How could you apply this concept to improve your negotiation or bidding behavior in future auctions or business deals?
CONTINUE THE CONVERSATION
Source texts
- 60 Cognitive Biases That Ruin Everything We Do by David Scott