The Escalation of Commitment: Why Good Managers Fund Bad Projects

Why the "Escalation of Commitment" traps smart managers in failing projects, and the cognitive tools required to fold a losing hand.



Introduction

Organisations often have a “Zombie Project”, an initiative that is clearly failing, deadlines are missed, the budget has ballooned, and it has gone wildly off course from the initial ROI analysis. For the ground team, the solution appears to be obvious: cut the losses and move on. Nevertheless, the manager in charge often does the exact opposite and doubles down. Budget extensions have been approved, and staff have been reassigned to the initiative. While this behaviour may be attributed to ego or stubbornness, that is seldom the case. Indeed, more often than not, the continued pursuit of failing projects results from a cognitive trap known as the “Escalation of Commitment”. The manager’s brain is not weighing future benefits against future costs; it is weighing the pain of past losses against the faint hope of redemption.

The Sunk Cost Fallacy

The Sunk Cost Fallacy, or the Sunk Cost Trap, is rather well known today. The phenomenon was formalised in a 1976 paper by Barry Staw. In his research, he illustrated that decision makers responsible for a previous failure are significantly inclined to commit new resources to that course of action compared to a new decision maker. This behaviour is driven by loss aversion, a concept popularised by Kahneman and Tversky in 1979. The psychological pain of locking in a loss is twice as much as the pleasure of gaining an equivalent benefit. Thus, when a manager cancels a project, they must go through the difficult psychological acceptance that the resources spent so far have been wasted. Yet, rather than accept the loss, decision-makers convince themselves that further investment will validate the previous expenditure. As a result, the past investment, rather than being a “Sunk Cost”, becomes a driver for future action.

The Dollar Auction

Research by Martin Shubik in 1971 provides a vivid illustration of this irrationality in his “Dollar Auction Experiment”. Here, an auctioneer auctions off a $1 bill to a room of participants with two simple rules: 1. The highest bidder wins the $1 bill, 2. The second-highest bidder must pay their bid to the auctioneer but gets nothing in return.

Initially, bidding remains rational with participants bidding 5 cents, 10 cents, and so on. However, once the bidding passes 50 cents, the sunk cost trap snaps shut. If someone bids 90 cents and their opponent bids 95 cents, they are faced with a dilemma: drop out and lose the 90 cents for nothing, or bid $1 to break even. By the end of the auction, participants end up bidding more than a dollar; they are no longer bidding to make a profit, but to minimise their loss.

Applied to the corporate world, the “Zombie Project” is the $1 bill, and the initial budget overrun is the highest bid. Decision makers continue to pour resources into a failing project, not because they believe in its success, but because of the psychological pain associated with paying for nothing.

Cognitive Repairs

Preventing an escalation of commitment requires cognitive repairs that separate decision-makers from their emotional investment in a given project. There are a multitude of methods to achieve this. Firstly, the organisation should implement a separation of roles. Staw’s research indicates that the individual who proposed a project is the least qualified person to evaluate its continuation. Hence, decisions vis-à-vis the continuation of a project should be made by a neutral governance board. Second, managers ought to establish “Kill Criteria” before a project’s debut. By committing to negative triggers, the necessity of making an emotional choice is removed. Finally, leaders must be taught and practice “Zero-Based Thinking”, meaning that decision makers must ask themselves whether they would launch this project with the current data if they had not invested anything. If the answer is no, the project ought to be cut.

Conclusion

Leaders are often lauded for their grit and perseverance. However, in the face of the Escalation of Commitment, such perseverance is a liability. Leadership is not simply defined by having the drive to start difficult things and pursuing them through thick and thin; it is also about possessing the discipline to stop them. By understanding the psychological pain that characterises sunk costs, managers and leaders can learn to fold their hand early and save their chips for a game that can be won.

References:

Kahneman, D., & Tversky, A. (1979). Prospect Theory: An Analysis of Decision under Risk. Econometrica, 47(2), 263-291.

Shubik, M. (1971). The Dollar Auction Game: A Paradox in Noncooperative Behaviour and Escalation. Journal of Conflict Resolution, 15(1), 109-111.

Staw, B. M. (1976). Knee-deep in the big muddy: A study of escalating commitment to a chosen course of action. Organisational Behaviour and Human Performance, 16(1), 27-44.

 

Commentaires

Publier un commentaire

Messages les plus consultés de ce blogue

The Galacticos Fallacy

Image
Managers are often obsessed with hiring “A-players”. However, the data suggests this is an ineffective strategy. Introduction Linear logic often dominates in the corporate world, i.e., if one star performer is good, ten is surely better. Consequently, firms find themselves paying premiums to assemble dream teams and fighting wars for talent. Yet, research suggests that this highly sought-after talent is not additive; instead, it is curvilinear. A 2014 study by Swaab et al. reveals this through the “too-much-talent effect”. Initially, adding more talent increases performance, but a saturation point is reached relatively quickly. Once the peak is reached, more star team members do not just yield diminishing returns but cause performance to suffer. The Interdependence Caveat The extent to which such a talent saturation is a danger depends entirely on a team's underlying mechanics. To prove this, Swaab et al. compared two different sports: baseball and football.   In baseba...
Lire la suite

The Praise Paradox: Why Compliments Kill High Performance

Image
The "Sandwich Method" of feedback is failing you. Data shows that while novices need praise to confirm their commitment, experts need criticism to gauge their progress—and mixing the two satisfies neither. Introduction The “Sandwich Method” of balancing a slice of criticism with two slices of praise to soften the blow is an orthodox management tactic. It feels safe, polite, and “balanced.” However, extensive research in 1996 by Kluger & DeNisi found that feedback intervention, whether positive or negative, reduced performance in 38% of cases. This is because leaders often view feedback as a one-size-fits-all tool rather than a dial that requires calibration to the recipient’s expertise. The Expertise Split 2012 research by Finkelstein & Fishbach demonstrates that novices and experts process feedback through entirely different mental lenses. For the novice, since they are new to the role, they are in a commitment phase where they are evaluating whether the j...
Lire la suite

From Chatbots to Agents: The New Org Chart

Image
As we move from AI models as copilots to AI models as employees, a question remains: who manages the bots? Since its release, Generative AI has rapidly gone mainstream, and organisations have been quick to adopt it. The tool has been used to create content, summarise text and generate images. However, a more profound shift is underway with the introduction of Agentic AI. Generative AI necessitates a prompt and is passive in nature. Conversely, Agentic AI can observe, plan and execute workflows autonomously. Consequently, leaders must rethink their org charts from the ground up, as managing AI has gone beyond software; it is now a digital workforce. The Shift From Right Brain Creativity to Frontal Cortex Execution To better understand this shift, a 2025 Boston Consulting Group Study provides a compelling biological analogy : Predictive AI is the left brain, focusing on logic, optimization and structured tasks. Generative AI functions as the right brain, focusing on synthesi...
Lire la suite