Do We Really Need to Change the Decision Maker? Counterintuitive Escalation of Commitment Results in Real Options Contexts

William Boulding (), Abhijit Guha () and Richard Staelin ()
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William Boulding: Fuqua School of Business, Duke University, Durham, North Carolina 27708
Abhijit Guha: Darla Moore School of Business, University of South Carolina, Columbia, South Carolina 29208
Richard Staelin: Fuqua School of Business, Duke University, Durham, North Carolina 27708

Management Science, 2017, vol. 63, issue 10, 3459-3472

Abstract: A robust finding in the escalation literature, termed as the preference effect, is that involvement in the period 1 initial project assessment decision increases the tendency for decision makers to stick with a losing course of action during the period 2 project reassessment decision. The proposed solution is to bring in a new decision maker in period 2. Across multiple studies, we show that providing period 1 information in real options format increases the tendency for decision makers to view period 2 focal event information as both more negative and more important. Consequently, such decision makers exhibit less escalation in period 2, i.e., exhibit behavior opposite to the preference effect. This suggests that, in real option contexts, not only do we not need to bring in a new decision maker, but also (counterintuitively) it is beneficial to retain the same decision maker in situations where escalation is likely to occur.

Keywords: real options; focal events; escalation of commitment; judgment and decision making (search for similar items in EconPapers)
Date: 2017
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Citations: View citations in EconPapers (2)

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