Escalation of commitment to failing investments is considered to be representative of biased forms of decision-making which may result in unproductive consequences. Decision makers adopt investment courses of action in initial conditions of uncertainty, which subsequently appear to lead to failure. When confronted with the prospect of their decisions producing losses, they commit decision errors thus escalating their commitment to their original courses of action.
Several theories with rational and irrational antecedents have been developed in the literature to explain the escalation phenomenon. Fundamental theoretical differences are associated with the origin of the concept. Escalation of commitment was conceived in the decision theory context of the problem of resource allocation under uncertainty conditions.
This thesis describes the resource allocation problem in order to identify and explain associated characteristics. Explanations of these characteristics reveal several problems: there are no decision rules available to handle uncertainty; decision makers consistently violate the requirements for rationality and rational economic decision making; individual utility maximization is divorced from the business objective of profit maximisation and also involves taking increased risks when there is an expectation that investment losses will be recovered; there are several criteria for and methods of investment evaluation which are computationally and analytically difficult to apply; and whether a decision error has been made is indeterminate with some investment projects whose success or failure cannot be determined until after project completion. These problems lead to the conclusion that the determination of the success or failure of an investment decision may depend on the valuation methodology selected. In this respect it is argued that investment decisions undertaken in public organisations should be evaluated using methodologies developed to measure social benefits and costs because calculations of private rates of return provide misleading assessments.
Research on the escalation phenomenon is dominated by a psychological perspective, which obtains its findings from extensive investigation of individuals in controlled experimental laboratory conditions. The experimental research has identified personal pre-dispositional, social and situational influences, which contribute to escalation and de-escalation of commitment. The major research focus has resulted in two theoretical explanations for escalation of commitment. These derive from descriptive cognitive motivational theories concerned with expectancy, that encourage rational decision making and dissonance, which in turn produce irrational self justification based decisions. An alternative research focus favours explanations from prospect theory. Research, critical of the psychological explanations favours rational explanations derived from the normative theory of expected utility, which encourages individual self-interested behaviour.
This thesis is concerned with explaining escalation of commitment in organisations. This necessarily involves adopting an interdisciplinary perspective. This thesis examines two world expositions, Expo 86 and Expo 88. World expositions are unusual government events whose principal purpose is to celebrate human achievements. Expo 86 was held to celebrate Vancouver’s centenary. Expo 88 was held to celebrate Australia’s bicentennial. They were not designed for their potential profitability. To justify the expenditures involved other objectives are attached to the celebratory purpose. These usually are associated with urban renewal and economic development. They are unorthodox investment projects. They involve long lead times of capital expenditure followed by short operating periods of six months or less, after which time most of the capital improvements are either disposed of or demolished.
Expo 86 incurred significant financial losses and was considered an escalation prototype. It became a case study used to develop a generalized theoretical model of escalation. The model specifies how initially formulated rational decisions are replaced progressively by decisions based on self-justification, which escalate commitment. Escalation is reinforced by psychological pre-dispositional, social and structural influences. The model is an extension of research findings from individual laboratory experiments.
The thesis identifies several plausible alternative theoretical explanations for escalation in organisations. These involve emotional commitment, social influences to conform to group norms, the possibilities for deviating from rational decision making principles in the presence of uncertainly and the agency theory problem which involves individuals pursuing their own rational self interests which are contrary to the objectives of an organisation.
Expo 86 was directly linked to urban renewal objectives. The economic project and urban planning studies of Expo 86 concluded that the event successfully achieved the urban development objectives using social cost benefit analysis as the criterion of evaluation. These objectives were rationally conceived and executed. As a result of the examination, the thesis explores the problems associated with investment projects having multiple objectives, looks at how rational explanations can be accommodated in the theoretical model and questions whether calculations of accounting negative rates of return should be the criteria for evaluation and the determinant of whether Expo 86 qualified as a prototypical example of escalation in organisations.
The analysis of Expo 88 reinforced these concerns. A longitudinal dimension was adopted in the case study. This enabled the origins of the event to be explored, the objectives to be identified and the project to be evaluated using various private and public investment criteria. Expo 88 qualified as a failed private investment project on all but one of the financial investment criteria employed. The evaluation of Expo 88 as a public investment project produced social benefits and economic impacts in excess of social costs.
Expo 88 was conceived by influential individuals who promoted the initiative for an exposition on the basis that its staging would be publicly and personally beneficial. The project was associated with multiple objectives other than its celebratory purpose that included tourism development and urban renewal from which the public was expected to benefit and which promoters believed justified the event. The principal decision makers were not directly influenced by profitability considerations because information had been provided during the planning phase, which indicated that the project would produce financial losses. Because of public pronouncements it became politically necessary to include the profitability of the project as an objective. Various costly and deceptive measures were adopted in order to generate an impression of profitability. At the same time success was promoted publicly and successfully, not in terms of its profitability, but in terms of attendance figures.
As a result of the analyses, the theoretical model was modified by incorporating rational motives into the original structure. Decision makers were driven by rational motives over the life of the projects. In the case of Expo 88 these rational motives derived from agency theory relationships and the pursuit of objectives concerned with economic development, celebration and political recognition.
The thesis concludes with a discussion of the contributions and limitations of the research. The contributions involve modifications to the theoretical model to reflect the importance of rational motives in the decision making process, generalisation of the causes of escalation in organisations in various contingent circumstances and the impact that multiple project objectives and methodological problems concerned with evaluation criteria have on theory development. The major limitation relates to the selection of public organisations engaged in unorthodox investment projects as inappropriate representatives to examine the escalation phenomenon.
