23 Dec Escalation of Commitment: Case in project management

The Scenario:

Picture this scenario, maybe we’ve facing a similar situation like this: The day is 8PM, it’s raining and we are standing on the taxi stand in a mall. Just a cross the street there is a bus stop. Since it’s raining, there are not many taxis available. We have two options: first, waiting for a taxi; or second, run into the rain across to bus stop and getting home by bus. The worst-case scenario if we make bad decision is staying until late night, and not getting neither taxi nor bus (since already end of bus schedule). This situation is called as “Escalation of Commitments”

The similar situation can also be happened in our project. We may have experienced a difficult situation (dilemma) to decide whether to stop the ongoing projects or provide additional cost and add extra time on problematic projects? Very often the project owner (and project manager) in the consideration of project sunk costs have an aversion in deciding to terminate the project that are having problems and somehow decided to give leeway to additional cost and time extension hoping that the problem can be resolved and the project will be completed although far from budgeted costs and time that has been planned. Most likely what will happen is that the cost of getting bigger and the project ended in failure.

What is Escalation of Commitment?

In International Journal of Management, Business and Administration Vol. 13, Number 1, 2010 – Fred C. Lunenburg from Sam Houston State University stated that Escalation of Commitment is the tendency of decision makers to continue to invest time, money, or effort into a bad decision or unproductive course of action. The expression, “throwing good money after bad” because they have “too much invested to quit” captures the essence of this common decision-making error. Escalation of commitment has managerial implications. Many organizations have suffered large losses, because a manager was determined to prove his original decision was correct by continuing to commit resources to a failing course of action.

The 4 main determinants in escalation of commitment:

What are the main drivers of this tendency to invest in losing propositions?

• Social (peer pressure)
• Psychological (gambling)
• Project (past commitments)
• Structural (cultural and environmental factors)

Prescriptions for Avoiding Escalation of Commitment:

Theresa F. Kelly and Katherine L. Milkman in their research on Escalation of Commitment suggested that knowing why and when escalation occurs can help managers avoid this common decision bias. Their research discussed and suggested several prescriptions for avoiding escalation of commitment, which are listed below (with the source/aggravator in parentheses):

• Actively seek disconfirming information about a chosen alternative (conformation bias).
• Reframe losses as gains to prevent risk-seeking behavior (loss aversion).
• Structure incentives so that decision makers are not punished for inconsistency (impression management).
• Hand off decisions about whether to commit more resources to an investment to new decision makers (personal responsibility).
• Be careful not to consider expended resources when making decisions (sunk costs).
• Make sure decision makers are frequently reminded of the goals of the investment (proximity to completion).

The Project Risk Management in PMBOK® is one of area of knowledge that can be used to minimized the escalation of commitment in projects, all decision during the project can be analyzed against the risk inherent on those decision, and using quantitative/qualitative analysis a good project manager can decide which best decision for the project or business at large. Risk based decision making (RBDM) is one of tools can be used.

So what is RBDM?

“Risk-based decision making is a process that organizes information about the possibility for one or more unwanted outcomes to occur into a broad, orderly structure that helps decision makers make more informed management choices.” More simply stated, RBDM asks the following questions and uses the answers in the decision-making process:

• What can go wrong?
• How likely are the potential problems to occur?
• How severe might the potential problems be?
• Is the risk of potential problems tolerable?
• What can/should be done to lessen the risk?

How does RBDM work?

Regardless of how formally you address risk-based decision making or the specific tools you use, risk-based decision making is made up of the five major components shown in Figure below.

Conclusions:

In many projects a project owner or project manager could facing a difficult situation in making decision on the future of the projects, this situation can lead to an issue of Escalation of Commitments. Using Project Risk Management and its tools and technique can avoid or minimized this situation, and making the best decision for all project stakeholders.

Written by: Noerachman Saleh, PMP