Irrational escalation

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Irrational escalation (sometimes referred to as Irrational escalation of commitment) is a term frequently used in psychology, philosophy, economics, and game theory to refer to a situation in which people can make irrational decisions based upon rational decisions in the past or to justify actions already taken. Examples are frequently seen when parties engage in a bidding war; the bidders can end up paying much more than the object is worth to justify the initial expenses associated with bidding (such as research), as well as as part of a competitive instinct.

Examples

• After a heated and aggressive bidding war Robert Campeau ended up buying Bloomingdale's department store for an estimated 600 million dollars more than it was worth. The Wall Street Journal noted that "we're not dealing in price anymore but egos". Campeau was forced to declare bankruptcy soon afterwards.^[1]
• Often when two competing brands are attempting to increase market share, they end up spending money without either increasing market share in a significant manner. Though the most commonly cited exmples of this are Maxwell House and Folgers in the early 1990s, this has also been seen between Coke and Pepsi, and Kodak and Polaroid. This can be seen as a commercial application of the Red Queen hypothesis.
• The dollar auction is a thought exercise demonstrating the concept.

Variation

Escalation of commitment is the phenomenon where people increase their investment in a decision despite new evidence suggesting that the decision was probably wrong. Such investment may include money (known informally as "throwing good money after bad"), time, or — in the case of military strategy — human lives. The term is also used to describe poor decision-making in business, government, project management in particular, politics, and gambling.

Escalation of commitment was recognized by Barry M. Staw in his 1976 paper, "Knee deep in the big muddy: A study of escalating commitment to a chosen course of action".

See also

• Sunk cost
• Zero-profit condition

References

^  Max H. Bazerman: Negotiating Rationally January 1, 1994 (ISBN 0-02-901986-9).

^  Barry M. Staw (1976): "Knee-deep in the Big Muddy: A Study of Escalating Commitment to a Chosen Course of Action". Organizational Behavior and Human Performance 16:27-44.