Irrational escalation of commitment

Ten years ago, I had the pleasure to animate 5 days about "commercial skills" in a large insurance company located in Paris. It was a large group made up of 20 people with different levels of experiences, knowledge and skills. They were representing 3 industries.

The purpose was to boost both people and sales results through sharing a terminology, models, tools and techniques. The program and the different activities were supposed to entertain and make people think about their job, their function, their approach and what could be envisaged in order to move their competencies forward.

At a certain point in time, one team leader wanted to share a difficult situation. When he took the word, he started by telling us all how proud he was to have succeeded in making the company he was talking about, become a large customer.

Then, he continued by disclosing the reasons why he had a problem. He was not only "not making" any profit with the client, he was loosing money.

To the question "how much money he was loosing", he answered "several millions of euros.

To the question "when he started loosing money", he answered 4 years ago.

I was so surprised by the apparent "non sense situation" that I very spontaneously asked him how it came nobody else in the company reacted and took the necessary actions in order to stop the pain and the drain.

Then, I asked him why he accepted to keep such a customer. His reaction is something I will never forget. He said: "You don't get it! It was so hard to influence so many people in the organisation in order to receive Presales budgets, tools, Human Resources, agreements on gradually more "aggressive conditions"; it was so time and energy consuming to meet with different interlocutors at the prospect and try to convince and motivate them to work with us; it was so important for our image and our reputation to have such a large reference.... Why in the world would we let such a customer go?"

If you are making little business, generating low margins or even loose money with the company you absolutely wanted to have as a customer, why would you risk your job and jeopardise your team? Why not try to renegotiate terms and conditions or even drop the customer?

This example illustrates the concept of "irrational escalation of commitment". People facing increasingly negative outcomes from a decision, an action, an investment, sometimes continue, instead of changing course and outcome. It is irrational but in line with their previous actions or decisions. They continue to dedicate resources, time, money to a failing course of action. Interestingly enough, it describes irrational decision making based on rational decisions made earlier!

The Vietnam war, the Concorde, the nuclear power plant in Long Island and many other examples (Queuing at the post or at the bank, much longer than what we can afford, staying until the end of a boring movie or show, keeping a not profitable customer, keeping expensive unworn clothes in a full closet...) illustrate this principle also called "the sunk cost fallacy" and relying on different factors, namely:

• Social proof (other people's pressure)
• Culture and environment
• Commitment and compliance (Past decisions and actions)
• Gambling, Ego, refusal to fail (and to admit it)
• ...

There is a very impressive yet classic exercise proposing to put 50€ by auction and let participants make proposals aiming at buying this amount of money. The rules are simple:

• Everyone can make one or several proposals but it is not mandatory
• Each higher bid needs to amount to minimum 1€
• The highest (and last) bid wins the 50€ against payment of the amount of money proposed
• The next to last bid must pay but does not receive anything
• The actual value of the 50€ is 5€

Although people tend to make a good deal, at least, at the beginning, the exercise quickly turns to a competition between 3 than 2 participants. Greed, ego and game are present.

The exercise systematically ends up with a "winner" committed to pay "much more that 50€" for winning 50€ and a "looser" committed to pay "more than 50€" for getting just nothing.

This illustrates a process some purchasers (too many) shamelessly imposed to potential partners: the reverse auction. They send a request for proposal to a large panel of possible suppliers. Then, they select the best answers, normally 3, and eliminated the rest. Instead of opening discussions with the shortlisted companies, they send them an invitation to participate to the final stage of the procedure: on a certain day at a certain time, candidates have 1 hour to improve their proposal. A the end of the timing, the winner is selected (and will certainly be invited to negotiate a contract) while others are eliminated. Everything happens using a graphical interface where points represent proposals and where people communicate by chat.

Deceitfulness? Deception? Maybe, even if participants are supposed to understand the game they are in.

While purchasers are just waiting for things to take place, participants not always understand they will be pushed to "propose against oneself" and become their own competitors.

So, what can we do?

1. First, why not thoroughly review our decision making processes? Where can it be improved?
2. Second, to what extend do we proactively challenge our own decisions?
3. Third, we should define limits and stick to them in any process where time, energy, money, resources, investments... are at stake.
4. Last for now, we should carefully select our "fights" and accept in certain situations, not to participate.

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