Psychology Approaches to Decision Making PDF

General notes: {#general-notes.mainheadings} -------------- - Know main theories and authors of each topic - Look at 1 or 2 recent articles of the authors - Do not repeat lecture content verbatim - Show how ideas link - Asterisk system -- if you remember something add "\*", "\*\*" and so on to show where the additional text is meant to go - Use seminar questions to guide revision/test Plan: {#plan.mainheadings} ----- 1. Revise topics 2. Look at 1 or 2 recent articles of the authors 3. Look at lecture recording for the topics 4. Handwritten notes on each topic 5. Check seminar content and activity 6. Check learning outcomes of each topic 7. Prepare introduction with definition (prepare key terms and theories defined) 8. Read book chapters of each topic 9. Ask ChatGPT to make flashcard questions, possible questions and answers to them 10. Make refined handwritten notes on each topic 11. Make list of main authors and topic related authors overview 12. Make list/table of theories, authors and terms within the theory 13. Use ChatGPT to create checklist for essay structure (like EoC) 14. Revise using notebook lm summarizes 15. Lage liten jukselapp og printe {#section.mainheadings} Exam topics: {#exam-topics.mainheadings} ------------ **Decision making theories and judgement** - Week: 1, 2, 3 and 4 - Theories that explain poor judgement and decision making - Rationality - Heuristics and biases - Illusion of control - (prepare introduction with definition) **Group dynamics and decision making** - Week: 6 - Nature of groups - Rational / logic - Limitations/risks = group dynamics - Mitigation/prevention - (prepare introduction with definition) **Escalation of commitment** - Week: 5 - What it is - Main causes (NB -- psychological, social, organizational and economic causes) - Prevention measures - Drummond 2012 - (prepare introduction with definition) **Creativity and decision making** - Week: 10 - Creativity x decision making -- logic, rationale - The work of Edward De Bono (thinking types, skills, techniques) - (prepare introduction with definition) **Negotiation** - Week: 11 - Two approaches (principles, approach, limitations) - Principled negotiation (principles/steps) - Don't forget power - (prepare introduction with definition) **Escalation of commitment** Checklist: ========== - Main authors - Key theories - Definition - Causes of escalation (NB -- psychological, social, organizational and economic causes) - **Drummond 2012** - Prevention strategies - Theories to explain causes - Comparisons of theories - Causes broken down in psychological, economic, social, organizational - Connections to theories and causes - Critique - Prepare introduction text - Erroneous abandonment Authors: ======== **Drummond and Brockner** as main citations - **Drummond** (Main author: causes, prevention and abandonment) - **Brockner** (main author discussing all theories) - **Staw** (Self-justification theory and rationality paradigm) - **Sleesman** (causes) - **Vroom** (Expectancy theory) - **Kahneman and Tversky (**prospect theory) - **Preston** (critique of traditional theories and presentation strategies and examples) - **Ku** (causes and prevention. Complexity with learning from de-escalation situation) - **Wong and Kwong** (causes: anticipated regret) - **Gigerenzer** (critique and cause/prevention) - **Goffman** (causes: impression management) - **Boyd**: Time perspective theory Possible questions ================== - Look at seminar related content for guidance - Look at learning outcomes of the weekly topic - Possibly the topics listed is information needed to answer question regarding de-escalation and erroneous abandonment 1. Use an example and discuss the causes of escalation to commitment to the example and how it could have been prevented 2. When should a decision maker escalate or de-escalate, what should be considered 3. Use an example to evaluate causes of escalation and how this could have been mitigated Definition ========== - Escalation refers to persistence with a course of action beyond economic justification (Drummond) - Any decision involving investment resources can result in escalation - A series of decisions - Resources are time, money and emotional energy - Tendency for decision makers to persist with failing courses of action (Brockner) - Make sacrifices in resources in hope of attaining goal or goals (Brockner) - Decisions usually evaluated against the economic model of maximizing utility - Erroneous abandonment / de-escalation: premature withdrawal from a project, investment or course of action that might still have potential for success. Opposite of escalation Structure: {#structure.mainheadings} ---------- **Introduction**: - Definition of EoC - use Drummonds definition: persistence beyond economic justification - Highlight Brockner focus on psychological tendencies: persistence with failing actions despite evidence to quit - Mention rationality paradigm as benchmark -- to show how EoC decision deviates from rationality due to emotional, cognitive and contextual factors - Reference time perspective theory suggesting basing decisions on past memories makes for less risk taking (Boyd) and future orientation s a reason for de-escalation because of delayed gratification - Show erroneous abandonment as a contrasting concept in framing EoC - Set the scope: Tell the marker how you are answering the question - Mention EoC stems from psychological, social, organizational, and economic factors - Introduce main theories of EoC (SJ-Staw, PT- Kahneman and Tversky, Expectancy theory- Vroom) - Acknowledge Gigerenzer critique of classical economic models and bounded ecological rationality perspective. - Frame EoC as a decision-making challenge influenced by bounded rationality (Gigerenzer) and the overriding of prospective rationality influenced by emotional bias and adopting a retrospective rationality instead. **Main body** **Main Theory as foundations for understanding EoC** - **Introduce this section as the theoretical foundation for understand EoC** **Self-justification theory (Staw):** - Cognitive dissonance and personal reasonability - Highlight confirmation bias and impression/image management as drivers - Becomes trapped in actions because not wanting to admit mistakes - Critical note: include Bowens critique on self-justification, alone cannot explain all EoC cases (e.g. economic curiosity) - Empirical evidence by Staw: greater escalation with more personal responsibility for initial investment (supported by self-justification, showing cognitive dissonance and image management drive persistence) **Prospect theory (Kahneman and Tversky)** - This theory evaluates probabilities and reachability of success - With the foundation of framing effects how decisions result within uncertainty: risk-seeking in domain of loss and risk-averse in domain of gain - Link to loss aversion as emotional driver -- not wanting to admit definite loss. Influencing behaviour of risk-seeking in domain of loss, still persisting to EoC - Framing sunk costs as losses triggers risk-seeking behaviour - Critical note: Brockners insight on prospect theory complements self-justification theory, but lacks nuance standalone with addressing individual differences. Don't account for emotional bias influence **Link self-justification to prospect theory** - Highlight how loss aversion (Prospect theory) explains an emotional motivation behind self-justification in behaviours in EoC, but not wanting to admit a definite loss based on self-justifying factors, and therefore escalate and justify to ease discomfort of dissonance with negative feedback and self-image. And Prospect theory as an explanation for behaviours that translates to self-justifying theory cognitive process with risk-seeking in domain of loss and loss aversion not wanting to admit loss - Loss aversion explains the emotional motivation to persist in failing projects, avoiding pain of accepting loss. Self-justification theory explains the following cognitive process, by justifying this emotional need to persist with creating reasons why original decision was valid - Highlight how loss aversion explains emotional drivers for self-justification theory - Link confirmation bias (cognitive dissonance influence and self-justification theory) with risk-seeking in domain of loss (prospect theory) - Emotional pain and risk seeking in domain of loss (loss aversion) drives irrational persistence - Cognitive dissonance (self-justification) provides rationalized explanations for that persistence - Together the theories show emotional and cognitive biases working together to drive escalation of commitment **Expectancy theory (Vroom)** - The theory that effort results in performance/rewards. Explain forward looking evaluation of subjective expected utility, in assessing probabilities and potential outcomes with the perceived value and reachability as the foundation. - Expectancy theory as a rational model that gets distorted by psychological drivers (cognitive dissonance, overconfidence, loss aversion) - Sunk cost connection: decision makers justify persistence due to irrational perceived attainability of goal, even when feedback suggest otherwise - Explains persistence by evaluating future success probabilities based on the subjective expected utility (value and reachability of goal). Complementing psychological causes by showing cognitive biases (overconfidence, IoC) distorting the perception of future utility, reinforcing escalation - Highlight role of perceived stability of feedback - Unstable feedback (temporary setbacks) increase persistence - Stable feedback (strategic flaws) decrease persistence. But often influenced by biases, interfering with the logic - Empirical study Brockner: the higher perceived value of goal and reachability, the higher increase of escalation - Critical note: oversimplification of emotional drivers compared to the other theories. Lacking emotional depth **Psychological causes and introduction to these causes** - **Introduce ego-defensive symptoms** as indicators of psychologically impacted EoC decision making - Highlight as indicators that escalate and recognize decision making biases and - Denial, belief, attribute failure, confirmation bias **Anticipated regret (Wong and Kwong)** - Emphasize future-focused emotional triggers with fear of regretting withdrawal, which increase escalation. - Link to prospect theory and emotional factors: discuss how regret influence forward looking decisions to persist or withdraw - Tie in anticipated regret to opportunity cost: highlight the fear of missing alternative opportunities, adding emotional pressure to escalate or abandon prematurely - Link to prospect theory, as an emotional forward looking bias - Sunk cost psychologically "anchoring" decision makers - Findings: people are more likely to escalate commitment when they anticipate greater regret for withdrawing that persisting. - The effect is independent of personal responsibility, adding another dimension of emotional influence to decision making. Complementing self-justifying with the focus on emotional drivers for escalation - Critical note: highlight its independence from personal responsibility factors, adding depth to emotional explanations **Sunk costs (Drummond, Sleesman)** - Connect sunk cost fallacy to self-justification theory (Staw) and cognitive dissonance - Emphasize the psychological need to justify past investments - Show how sunk cost psychologically "anchor" decision makers, driving irrational commitment by tainting the objective opinion (Drummond, Sleesman) - the sunk cost distort rational evaluation by anchoring in past investments. Making decision makers emotionally and cognitively tied to their investments, making them persist irrationally (retrospective rationality with loss aversion influence going against logics of expectancy theory with forward looking calculations of subjective expected utility, emphasizes by self-justification theory of cognitive dissonance) - Link to prospect theory and loss aversion: individuals framing sunk costs as losses, triggering risk-seeking behaviour in domain of loss - And self-justification (Staw), emphasizing emotional barriers to withdraw - Sunk cost fallacy as result, prioritizing retrospective rationality (rationality paradigm confliction for idealized decision making looking backwards), heightened loss aversion (prospect theory, further justified by self-justification theory), and emotional bias and influence like anticipated regret, - **Overconfidence / illusion of control** - Link to prospect theory and how overconfidence amplifies risk-seeking behaviours in loss in domains, as they believe they can recover losses - Example: BP deepwater horizon oil spill. - **Risk-seeking in domain of loss:** - Wanting to avoid a definite loss, they "gamble" more resources, losses are emotionally a heavier burden than gains as described by loss aversion. - A psychological explanation through prospect theory on how people face losses, with wanting to avoid the uncertainty if losing, so risk even more, even if irrational. In domain of loss, loss aversion heightens their motivation to avoid or minimize losses - Risk-aversion in domain of gains: explains the contrasting concept of opposite behaviour in EoC or premature abandonment **Ku on psychological causes:** - Sunk cost is psychologically arousing (mergers, acquisitions etc.), the higher arousal the more impaired decision making. Justification as main driver with people requesting more retrospective information that future probability calculations of success. Domain experts more likely to escalate than novices, because of personal investment in initial decision - Domain-relevant expertise drive escalation due to personal responsibility and attachment - **Discussion:** Ku highlights justification and self-vindication over choice as emotional drivers and main cause for Eoc. According to Ku, commitment to failing projects is primarily phycological need to justify past decisions, aligned with justification theory (Staw), rationalizing escalation to protect self-esteem and public image. While Sleesman emphasize sunk cost and personal responsibility as critical predictors for escalation. Sunk cost creates psychological barrier to quitting, the more invested, the harder to withdraw. And higher personal responsibility of initial investment, the more likely to escalate commitment to avoid admitting failure and personal attachment to project. While Bowen criticized the perspective rooted in classic economic models, and sees decisions more as dilemmas rather than decision errors caused by incomplete information and unclear feedback (rooted in bounded rationality) - **Theories overlap and connection:** risk-seeking in domain of loss (prospect theory) with emotional discomfort with loss aversion to self-justification theory with cognitive rationalizing for sensemaking. - Sunk cost cause example for theory connections: Retrospective rationality with loss aversion influence going against logics of expectancy theory with forward looking calculations of subjective expected utility, emphasizes by self-justification theory of cognitive dissonance **Social causes and introduction to these causes** **Impression management (Goffman)** - Highlight role of maintaining favorable public perception and avoiding public failure - Link to self-justification theory- public accountability and fear of reputation damage drive persistence or premature abandonment or erroneous abandonment - Link to social norms and pressure: cultural expectations (stick to your guns) amplify persistence (Ku; Sleesman) - Link to audience effect: how decisions in public increase psychological cost of admitting failure (Brockner) - Empirical evidence: Staw: job insecurity increased escalation - Example: Volkswagen emission scandal **Group dynamics (Sleesman)** - Peer pressure, conformity and role of audience in amplifying escalation tendencies - Connect social conformity to groupthink: highlight how group cohesion reinforce collective escalation decisions, and may result in poor and incorrect feedback. Tied to organizational causes, where critical evaluation is suppressed - Critical note: highlight the normalization of escalation behaviors in competitive or high stakes environments **Ku on various causes:** - "Sticking to ones guns" - Justification need - Competition - Need for perceived consistency (linking to self-justification) - **Modeling**: - Normalization of escalation with social learning theory suggesting people copy behaviours of others, especially in uncertain situations **Organizational causes and introduction to these cause** **Organizational inertia** - Relate to sunk cost: emphasize how institutional investments create barriers to withdrawing projects (Staw; Drummond) - Link to social pressure: with organizational norms reinforcing persistence in EoC **Completion bias** - How proximity to project completion influence decision making, creating illusion of progress and control (Sleesman, Drummond) **Cultural norms** - Relate cultural norms to social pressure: highlight how failure averse cultures stigmatize withdrawal, pushing decision makers to persist **Economic causes** - **Political pressure:** stakeholders fearing reputational damage - Penalty payments to sub-contractors - Low salvage value - Possible reputational costs of quitting - Opportunity cost awareness as a rational factor that competes with emotional drivers **Prevention and De-escalation** - **Reframing and framing effects** - Link to prospect theory of framing losses and gains - Connect to dual process thinking system1 and 2 thinking (Kahneman): highlight reframing process promotes more elaborate decision-making processes (Brockner). Emotional to analytical thinking **Structured decision making** - Link role separation and audits to self-justification with mitigating biases like impression management and personal attachment with differentiated structure in decision making roles - By switching and not having the initial decision maker at start of investment as main project leader throughout to eliminate personal attachment as highlighted by Ku in psychological drivers for EoC. - Link to setting limits and milestones with rationality paradigm, by fostering prospective rationality by preventing escalation for more ideal decision making. **Anticipated regret and opportunity cost** - Tie regret mitigation to prospect theory: how focusing on opportunity cost redirects decision makers away from sunk costs. Shifting to opportunity cost to evaluate potential benefits of alternative actions or investments rather than justifying further investment in a failing project. This approach helps reframe the decision from a retrospective focus, how much have we already spent? to what is the best use of resources going forward? (prospective focus). To de-escalate and stop investing in failing project due to sunk cost fallacy, emotional attachments or self-justifying needs. **Cultural reform prevention strategies (Janis)** - Adopt a learning culture and not stigmatize failure, as people tend to escalate or premature abandon to not be associated with potential failure project - Normalize failure - Foster critical thinking and prevent groupthink and conformity **Gigerenzer: knowing risk and accountability** - Knowing the risk and understand probabilities and potential consequences for informed and rational decisions on withdrawing or persisting - Knowing accountability, as it influences decision makers, knowing they will be scrutinized for decisions, and is more likely to avoid emotional bias. Focusing on objective and rationality rather than emotional justification. Encourages reflections on own actions **Discussion: why it's difficult (Ku)** - Ku highlights the complexity of learning from escalation situations for future prevention strategy. As it requires cognitive learning, as when accessing information for solving new problem, irrelevant information is often recalled. Explaining even though learning from one de-escalation situation, it is not guaranteed that learning will be transferred to the next one. But learning from mistakes is more effective. Using post-escalation regret as proactive tool to learn and reflect can be effectful. As regretful experiences are more salient and memorable, resulting in greater likelihood of recalling lesson learned - Reflective learning strategy post-escalation **Erroneous abandonment (Drummond)** - The contrasting concept to escalation of commitment, where a project is prematurely abandoned, even though it may have yielded success. - Driven by loss aversion and opportunity cost consideration - Stemming from system1 thinking with fear of potential risks with framing decisions in the domain of loss, becoming risk averse (prospect theory). Reframing situation as potential gain can encourage calculated risk taking through system 2 thinking. - Reframe thinking to system 2 with adapting multi calculated mindset for assessing prospectively instead of retrospectively (rationality paradigm and expectancy theory), assessing future possibilities of success. - Prospective rationality evaluating future utility is often influenced by emotional bias to interfere logic. Dual process thinking (Kahneman) can mitigate retrospective rationality focus thinking. - Emphasize accountability knowledge - Future oriented thinking focusing on potential benefits rather than sunk cost - Escalation arise from psychological drivers like sunk cost and self-justification, reinforced by ambiguous feedback and social pressure - Link to prospect theory, framing in domains of gains, becoming risk averse and leading to premature withdrawal - Role of anticipated regret with opportunity cost regret **Discussion**: - Criticizes the classic standard economic model of unbounded rationality with the ideal that people can maximise utility with complete informational and logical reasoning, and draws on Gigerenzer ecological rationality, that decisions should be made in its own decision environment based of contexts and factors for the specific situation. - Ecological rationality recognizes the constraints and uncertainty decision makers face in the real world. - Shifting focus from looking at Eoc as irrational, which overlooks the actual environment **Critical analysis and critique** **Perspective:** - Judged from the standard economic model, Eoc is viewed as irrational, however, it might be a rational response to the uncertain circumstances decision makers face in real world. Additionally, from self-justification perspective, it can be viewed as rational, in order to mitigate discomfort from cognitive dissonance **Bowen: decision dilemma or decision errors** - Argue escalation may not result from decision errors, but stem from dilemmas created by ambiguous feedback and uncertain condition - As a critique to Staw and self-justification that EoC is a syndrome of decision errors - Challenges assumption that decision makers are significantly accountable - Reinterprets escalation decisions as rational response to ambiguous or incomplete feedback, suggesting bounded rationality and lack of clear negative feedback leads decision makers to committing - A nuanced view of escalation contrasting with theories focusing solely on cognitive biases (e.g. sunk cost, overconfidence) or emotional drivers - Highlight need for structured decision making and cleared feedback mechanisms for prevention strategy (independent audits, benchmarks etc.) **Brockner** - EOC decisions are usually evaluate against economic maximizing utility, but can be criticized from the bounded rationality perspective that argues it's not possible to maximise outcomes, only satisfice, that individuals cannot maximize utility given constraints. Like cognitive constraints, incomplete information and time pressure (Brockner) - **Gigerenzer: ecological rationality** - Introduce new concept that accounts for the uncertainty and individual contexts of an escalation situation, to withdraw or persist and not to be judged against unrealistic standards. Even if seemingly irrational - in case of EoC: for example, in high stakes industries with incomplete information, success might require persistence. - Decision makers might continue investing because of belief that setbacks can be overcome - Arguing decisions are most rational (economically wise) when they are made with understanding real world conditions **Theories:** - Self-justification: criticized for inability to account for all instances of escalation like economic curiosity, instead of purely emotional reasoning - Expectancy theory: oversimplify emotional complexities by assuming rational calculations (Brockner) - Prospect theory: complements self-justification but fails to explain escalation driven by social or organizational factors **Example:** **Taurus project (Drummond)** - IT initiative project by British government for the London stock exchange. The case exemplifies how escalation can result across micro to macro level impact with societal and organizational dynamics influencing decision making flaws - Became a symbol of the Stock exchange authority and competitiveness, creating social and political pressure to persists - Lost 400 million pounds - Stakeholders persisted due to sunk cost and organizational inertia - Drummond argued that mechanisms for legitimacy was lacking like cost-benefit analysis, reinforced the decision to continue despite technically not possible **Causes:** - Roles constraining decision makers, failing to challenge the projects viability - Organizational rituals prioritizing compliance over critical evaluation - Ineffective feedback loops due to poor communication - Overconfidence from technical teams - Persistent optimism despite gradual progress, made illusion of eventual success - Overoptimism bias, overconfidence, illusion of control, confirmation bias **Mitigation**: - Need for systemic interventions - Independent reviews and dynamic feedback mechanisms - Structured decision-making benchmarks aligned with rationality paradigm of prospective rationality, ensuring decisions focused on future utility rather than retrospective justification **Theory tie in:** - **Sunk cost** explains stakeholders persistence. Being psychologically anchored to prior investment, leading to irrational persistence due to emotional discomfort of admitting failure and wasting resources - **Self-justification theory (Staw):** justified actions to ease cognitive dissonance, with confirmation bias to align belief of prior decision as rational and correct. Image management concerns influence included, with the project becoming a symbol - **Prospect theory (Kahneman and Tversky):** stakeholders perceived themselves in domain of loss, with loss aversion explaining the risk-seeking behaviour to escalate and gamble further resources in hope of eventual success - **Overconfidence and illusion of control:** overconfidence within technical teams and illusion of control over eventual success - **Expectancy theory (Vroom):** overconfidence amplified the belief that more effort would result in success, increasing persistence. Perceived instability of setbacks (like temporary technical hurdles) also reinforced belief in projects attainability - **Social pressure:** the projects symbolism, creating strong societal and organizational pressure - **Impression management (Goffman):** leaders likely escalated to maintain favorable public impression, avoiding admitting failure **France/Britain Concorde: supersonic aircraft (Preston et al)** - Government representatives failed to ignore sunk costs - Continued investment in Concorde, long after it became clear the project would generate little return - But was still in production because "they had too much to lose" **Theory tie in:** - Sunk cost: continued investment despite low returns because of already committed substantial resources - Self-justification - Prospect theory: framed in domain of loss, decision makers became risk seeking, further investing over accepting definite loss. Avoiding loss than seeking gains - Social and political dynamics: national pride and importance - Impression management **Iraq and Vietnam war (Preston)** - Argument to stay on course with too many lives had already been lost, and those lost lives would be in vain if war was not won - Speech of President Bush in 2005 for staying in Iraq war "We owe them something" - Same argument made for Vietnam war, with more lives lost the harder to withdraw ### General theory integration, connections and overview **Self-justification theory:** psychological drivers of EoC through cognitive dissonance and personal responsibility. emphasize cognitive dissonance and rationalization. Show how decision makers justify escalation to align with prior decisions and protect public and self-image. (sunk cost (Sleesman), impression management (Goffman), Loss aversion (Prospect theory) **Prospect theory:** highlight framing effects (e.g. sunk costs as losses) and loss aversion to explain why decision makers become risk-seeking. **Expectancy theory:** incorporate role of feedback, with perceived stability and overconfidence in reinforcing escalation behaviour **Social causes:** impression management and societal pressure to persist, especially in high-visibility projects **Mitigation:** presentation strategies, independent reviews, reframing sunk cost, dual process thinking, ecological rationality and rationality paradigm, feedback mechanisms Glossaries / characteristics of Escalation of commitment ======================================================== **Escalation situations characteristics** - A series of actions in repeated decisions to continue despite negative feedback - Uncertainty in likelihood of achieving goals, being unknown or ambiguous - There is always a freedom and choice to either persist or withdraw from the course of action - The lack of clarity if resources will be investments or expenses and will either aid or fault goal attainment, complicates the decision-making process and creates tension. Uncertainty in outcome taints the decision making - People may invest more if the sunk costs are greater, resulting in escalation to commitment **"No man's land"** - Decision makers being set in a difficult position with invested recourses but then receiving negative feedback, indicating goals have not been achieved yet - Then become uncertain if continuing to invest more recourses will lead to success or more loss leading to a "no man's land" situation **Dual perspective on resources** - Investments vs expenses - If additional investments lead to success, past resources are considered investments and becomes justified - If efforts fail, recourses are considered expenses and are unjustified and wasteful **Persist or withdraw** - Continue course of action, risking further loss but hoping for success - Withdraw and cut the losses **Sunk cost fallacy** - Decisions influenced by sunk cost leads to sunk cost fallacy - The mistake of remaining committed to a past decision based on the misconception that the cost already incurred can be recovered. **Subjective expected utility** - Used to assess the attractiveness of an economic opportunity as perceived by a decision-maker in the presence of risk. - Where the probabilities are objectively unknown, so the decision maker has to form subjective beliefs - Linked to escalation process in deciding to continue project **Self-justification theory (Brockner)** - Theory by Staw - When a person encounter cognitive dissonance, in a situation where a person's behaviours are inconsistent with their belief, then tends to justify and deny negative feedback associated with the behaviour - Rationalizing decisions to fit their own beliefs (personal confirmation bias), and ease discomfort from cognitive dissonance - Escalation allows to reaffirm their correctness - Emotionally driven and image management (shown in Staw empirical evidence case study. Individuals with more responsibility of investment had greater escalation) - Justification at the cost of rational choice decision making - Critiqued for being too simplified, not taking into account other factors **Expectancy theory (Brockner)** - Theory by Vroom - Evaluation of future probabilities and values - Forward looking, assessing potential outcomes of investment with subjective expected utility. - Committing to escalation links to how much the perceived likelihood of success is and value of achieving goal - Brockner study showed individuals who perceived goals as attainable and valuable escalated more - Belief that efforts will lead to success - Influences of EOC and expectancy theory: Negative feedback evaluate by its stability: - **Unstable cause (e.g. setbacks**): reinforce persistence because belief that more efforts leads to performance/success - **Stable causes (flaws in strategy): Decrease escalation because success seems unlikely** - Persistence was higher when goals were perceived as higher value within reach - Critique: Accounts for rationality unlike self-justification, but miss emotional aspects of EOC **Prospect theory** - Theory by Kahneman and Tversky - A phycological mechanism and theory to explain escalation of commitment without invoking self-justification process - Focuses on how decisions are framed in relation to risk - Risk averse in domains of gains: prefer sure gain to speculative gamble - Risk seeking in domains of loss: choose risky gamble than sure loss - Feeling pressure to adhere and honor lost investment - Prefer to take risk than admit loss (linking with processes of self-justification and image preserving) - More risk seeking when faced with loss aversion and prospect of losing resources already committed **Loss aversion** - Cognitive bias Influencing escalation of commitment - Cognitive bias that describes tendency to avoid losses over acquiring gains - The feeling of the pain of loss more than the pleasure of equivalent gain - Linked to prospect theory: tendency to be more sensitive to losses than gains of same magnitude - In escalation of commitment, individuals frames in domains of losses, preferring risk over definite loss - The pain of losing something is more intense than the joy of gaining the same thing - Explains an emotional driver behind why people are willing to "gamble" and further escalate. Admitting failure would mean accepting a certain loss, which is emotionally painful due to loss aversion. Instead they become risk-seeking and furth escalate commitment hoping to turn investment around to avoid loss (prospect theory) **Rationality paradigm** - Framework to understand escalation to commitment to benchmark rational decision making and the deviation from this with escalation of commitment - EOC challenge rationality paradigm by committing to a failing project despite evidence to quit. - Linking with and influenced by classic rational choice model emphasizing optimal decision making with all information available and self-justification of emotional influence - Deviating from rationality with biases of emotional factors and sunk cost. - With individuals acting unrationed, prioritizing past investment over future utility - **Retrospective rationality:** maintaining consistency by justifying past decisions - **Prospective rationality:** ideal decisions should prioritize future utility, but logic is often influenced by sunk cost and biases - **Self-justification** overrides prospective rationality for future utility, contradicting rationality paradigm with retrospective rationality influencing decisions with biases instead of objective assessment. - **However:** from self-justification perspective, retrospective rationality behaviour is psychologically rational by mitigating discomfort from cognitive dissonance and maintaining self-image and self-esteem, even if economically irrational **Framing effects / loss aversion** - Peoples choices are influenced by how outcomes are presented (e.g. potential losses or gains), even if underlying probabilities and outcomes remain the same. Explains escalation process and behaviours with how the potential outcome is viewed **Premature abandonment:** - **Framing effect in domains of gains** - Prospect theory explains how risk-aversion in domains of gains can result in premature abandonment of project/investment, where decision makers lock in partial progress to avoid losing gains. Evaluations of opportunity cost, loss aversion and organizational shifts can influence withdraw - Contrasting to escalation to commitment and risk-seeking behaviour in the domains of loss with loss aversion and self-justification to stay on course even when failing **Erroneous abandonment** - The opposite of EOC: quitting too soon rather than persisting - Prematurely ending a project that may have led to success - Critique to the rationality of abandonment decisions. Not all abandonment is justified, rational or appropriate - Projects may fail/be withdrawn due to bias and misjudgment **Ecological rationality** - Decisions are rational within their specific environments, meaning persistence in escalation of commitment may be rational and a reasonable gamble under uncertainty. Contextual and situational based, diverting and contrasting idealized classical models Causes of escalation of commitment (theory-based) ================================================= - **Expectancy theory (Vroom):** negative feedback perceived as unstable (e.g. temporary setback). Reinforces commitment to follow belief that more effort equals performance/rewards - Evaluation of unknown objective probabilities assessing subjective expected utility - The higher value perceived of goal and reach, the higher escalation of commitment - **Self-justification (Staw):** person encounters cognitive dissonance, and tries to justify actions and deny negative feedback to ease discomfort of unalignment with own beliefs. - Emotionally rooted in image management - Rationalize own beliefs and actions seeking a self-confirmation bias perception, leading to escalation - Past decision heavily influence decision making in order to preserve self-image, status and public perception. Not wanting to admit wrongs - **Prospect theory (Kahneman and Tversky):** Complements self-justify theory with explaining how the risk-seeking behaviour occurs with framing effects of seeing potential outcome as a loss, increasing risk-seeking behaviour, with not wanting to accept definite loss and sunk cost, resulting in sunk cost fallacy. Which explains fundamental behaviour behind self-justification theory (Staw) that emphasize the cognitive process influences by emotions and biases with not wanting to admit failure, protect self-image and perceptions. Theoretical explanations ======================== The decision to escalate commitment can be influenced and explained by two main theories rooted in cognitive dissonance and expectancy theory. First, the cognitive dissonance of self-justifying, and rationalizing decisions to commit in a failing course of action as an emotional response to not wanting to admit mistakes were made when committing to escalation, making the fallback a hard task. Almost in a way to confirmation bias oneself, based on the fear of not maintaining public image competence or self-esteem. Second, expectancy theory, the belief that effort will lead to performance and rewards. Focusing on the potential for future success, while neglecting or ignoring negative feedback. Where decision makers calculate the subjective expected utility and outcomes based on value, and was shown that persistence was higher when goals were perceived as high value and within reach (Brockner) - While these two explain different parts of the psychology behind escalation of commitment, the forces interact and makes the escalation a complex decision-making process (Brockner) - Theoretical controversy in scholars when explaining escalation of commitment Decisions to allocate resources to failing course of action can be explained by two different forces: 1. Rationalizing or self-justifying. The unwillingness to admit mistakes in committing to the initial course of action 2. The prospective rational side (expectancy theory) of people that focus on the probabilities and value associated with commitment to the course of action. This side ignores the impact of prior investments, unless they help them to determine to continue (confirmation bias influence) ### Self-justifying / rationalizing behaviour (Staw) (Brockner) Individuals seek to maintain consistency in their beliefs and actions, and when faced with evidence of the initial resource allocation was incorrect, they experience cognitive dissonance. To reduce discomfort they escalate with their commitment to validate the correctness of earlier decisions - Self-justification theory by Staw, rooted in Festinger theory of cognitive dissonance - Staw with self-justification theory establishes a foundational framework for understanding escalation of commitment - Because of cognitive dissonance, the individuals might inherent confirmation bias on themselves to ease the discomfort. Adjusting to align with past behaviours backed up by one's own confirmation bias - People follow a self-justifying behaviour rather than being guided by expectancy theory - Decision makers become trapped in a previous course of action because of their unwillingness to admit to themselves or others that prior resources were wasteful - Simply, people don't like to admit their past decisions as mistakes and incorrect. Reaffirming themselves - Rationalize past decisions by becoming more committed to them - Escalation allows decision makers to reaffirm their belief that earlier choices were correct even when facing failure - Like a self-individual confirmation bias, seeking confirmation within one's own course of action to keep going - Coming from a need to protect self-esteem or maintain public image of competence, and is. Emotionally driven process where past decisions heavily influence current choices **Empirical evidence:** Staw demonstrated decisions makers who were personally responsible for initial investment exhibited greater escalation in the face of negative feedback compared to those without such responsibility. Underscoring the role of self-justification as individuals want to preserve their self-image. Additionally, Brockner further validated that decision makers have strong need to justify prior investments, often at the cost of rational decision making **Critique:** This viewpoint on escalation of commitment has been under heavy scrutiny from scholars on the legitimacy of the theory being an explainer for EOC. While widely supported, Bowen argued that alone it cannot account for all instances of escalation. Example: decision makers may persist due to economic curiosity, which is not inherently tied to cognitive dissonance ### Expectancy theory (Vroom) (Brockner) A forward-looking perspective, emphasizing decision makers calculations of the subjective expected utility of continued investment. Suggesting persistence depends on perceived likelihood of success and the value of achieving the goal. As shown in empirical study by Brockner, decision makers were more likely to persist and commit to escalation if they perceived the goal as valuable and within reach (Brockner) - Expectancy theory (Vroom) - "The belief that effort will lead to performance and then rewards" - Assessing the probability that additional investments will achieve the goals - Decision makers calculate the subjective expected utility of continuing the investment - Negative feedback is interpreted based on its stability - **Unstable causes** (e.g. temporary setbacks) increase likelihood of persistence because success seems achievable with more effort - **Stable causes** (e.g. inherent flaws in the strategy) decrease persistence because success appear unlikely - persistence was higher when goals were perceived as high in value and within reach - evaluation of future probabilities and values **Critique:** unlike self-justification and prospect theory, expectancy theory assume a rational evaluation process, which may oversimplify the complex and emotional nature of escalation decisions (Brockner) ### Prospect theory (Kahneman and Tversky) (Brockner) Prospect theory by Kahneman and Tversky provides an alternative explanation, focusing on how decisions are framed as gains and losses and explains how people make decisions under uncertainty. Suggesting, individuals are risk-averse in domain of gains but risk-seeking in domain of losses, because people are more sensitive to losses than gains (making choices that minimize losses rather than maximizing expected gains. In escalation situations decision makers often perceive themselves in domain of losses and prefer to take risks rather than accepting a definite loss. The pain of losing something is more intense than the joy of gaining the same thing, called risk aversion **Risk averse in domain of gains:** When faced with potential gains, people prefer certainty over taking risk. Don't want to lose a sure thing by gambling for a higher reward. **Risk seeking in domain of losses:** When faced with potential loss, people prefer to take risks in hopes of avoiding the loss. Want to avoid the pain of definite loss and are willing to gamble, even if that means risking more. In losses people want to avoid uncertainty of losing, so they take risks, even irrational ones **Comparative insight:** prospect theory compliments self-justification by focusing on how framing influences risk preferences. Brockner highlighted self-justification offers more nuanced explanation when personal responsibility is high. Findings suggest while prospect theory explains general risk-seeking behaviour, self-justification better account for individual variations based on feedback framing and responsibility (Brockner) ### Rationality paradigms (Staw) Rationality paradigms can be used to understand escalation of commitment with providing a framework for benchmarking rational decision making and how escalation of commitment deviates from rationality. Escalation of commitment challenges the rationality paradigm because it involves continuing failing projects despite evidence. Linking with self-justification theory and classical model rational choice theory with emphasizing optimal decision making based on available information. Deviating from rationality with biases with emotional factors and sunk cost, with individuals acting irrationally by prioritizing past investments over future utility **Retrospective rationality:** Decisions are justified by past actions, focusing on maintain consistency rather that achieving future success **Prospective rationality:** Ideal decision making should priorities future utility, yet sunk costs and biases often interfere this logic **Link to self-justification theory:** self-justification contradicts rationality paradigm because decisions are influenced by retrospective reasoning rather than prospective utility and the need to protect self-image overriding objective assessment. However, from the perspective of self-justification, the behaviour is psychologically rational, with escalating commitment reduced dissonance and preserves self-esteem, even if economically irrational Causes/drivers of escalation ============================ ### Psychological causes Escalation often stems from cognitive biases such as sunk cost fallacy, overconfidence and illusion of control. These biases impact rational decision making and evaluations, causing decision makers to overestimate their ability to achieve success or undervalue the risk of continuing because of the tainted perspective and evaluation. With project underway, illusion of control may arise to self-justify actions and sense making of seeking control Escalation usually start with positive promises and overoptimism about a decision, also failure to conduct risk assessments and poor project planning with over ambitious targets **Sunk cost (Drummond; Sleesman):** Sunk cost is an investment made with an anticipated return, making the course of actions continue. Investments create psychological barrier to withdraw even when further investment is irrational. Decision makers are irrationality anchored on past investments. Leading to sunk cost fallacy. **Overconfidence and overoptimism:** decision makers frequently show overconfidence in their ability to control outcomes, leading to persistence of failing projects **Illusion of control:** The illusion you have more control over a situation than what is the reality, or the ability to control a situation and outcome. Example: deepwater horizon oil spill. BP executives underestimated the risk associated with deep-sea drilling and overestimated their ability to manage potential failures. **Ego-defensiveness: symptoms:** **Denial**: Refusing to believe problems are real **Confirmation bias:** pay more attention to information that confirm pre-conceived views. Downplay or ignore disconfirming information **Belief** success is close **Attribute failure** to external factors beyond their control **Anticipated regret / regret theory (Wong and Kwong; Drummond):** introduces anticipated regret as forward-looking emotional trigger of escalation, as describes in the rationality paradigm with prospective rationality. Decision makers are influenced not only by sunk cost, personal responsibility and etc., but also the desire to minimize future regret. **Findings**: **people are more likely to escalate commitment when they anticipate greater regret for withdrawing than persisting.** The effect is independent of personal responsibility, adding another dimension of emotional influence to decision making. Complementing self-justifying with the focus on emotional drivers for escalation. Anticipated regret influences decision making by looking forward, prospectively, and not backwards, retrospectively. Making the possible future regret influence current decisions. **Justification / most supported cause (KU)**: The need to justify investment. The psychological discomfort results when negative feedback about chosen alternative. Additionally to justify loss, investment are rationalized and justified by escalating commitment individuals so that choices are vindicated. Thus, personal responsibility in initial negative decision results in higher escalation. **People tend to request retrospective information more than prospective** Individuals with domain-relevant expertise are more likely to escalate than novices, since experts are more personally invested in initial decision **Psychological factors (Ku)** - Loss frames - Differences in self-monitoring - Achievement striving - Sunk cost being psychologically arousing, impairing clear and rational decision making - The higher arousal (acquisitions, mergers etc.) the more it impaired decision making - The role of regret plays an important part in prevention strategies in de-escalation - Adaptive learning - Dislike of waste and appearing wasteful **Sunk cost and personal responsibility are the strongest predictors (Sleesman)** of escalation, consistent with self-justification theory. Anticipated regret and opportunity cost awareness mitigate escalation tendencies by shifting focus to alternative courses of action **Risk seeking in domain of loss and loss aversion (prospect theory):** a phycological explanation through prospect theory on how, when people are faced with losses, they want to avoid the uncertainty of losing, so they risk even more, even if irrational. When people are in domain of losses, loss aversion heightens their motivation to avoid or minimize the losses. **Framing decisions in domains of gains** - Wanting to avoid a definite loss, they "gamble" more resources, as described by loss aversion, losses are emotionally a heavier burden than gains - Risk-seeking is a reaction to psychological pain of loss aversion - Loss aversion explains the emotional driver behind why people are willing to "gamble" and escalate - Risk-seeking behaviour is a response to loss aversion **Summary:** - Sunk cost - Overconfidence / overoptimism - Illusion of control - Ego-defensiveness symptoms (denial, confirmation bias, no accountability, belief) - Anticipated regret - Vindication of choices with justification - Personal accountability and attachment - Risk-seeking in domain of loss - Loss aversion **Authors** ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- **Ku:** justification as main cause. Retrospective information instead of prospective used to process decision making. Focus on self-vindication, heightened by personal responsibility and psychological impact factors **Wong and Kwong:** anticipated regret influence escalation with higher perceived anticipated regret with withdrawal increasing escalation **Sleesman:** sunk cost and personal responsibility as main cause for EOC **Prospect theory (Kahneman and Tversky):** Suggest framing effects if the domain is loss or gains influence behaviours leading to either escalation or de-escalation/erroneous. Individuals are risk-seeking in domain of loss, increasing the risk of gambling as not wanting to accept definite loss. **Self-justification theory (Staw):** Cognitive processes taint rational decision making with biases and emotional aspects like not wanting to admit being wrong, keep self-esteem and image. Impression management (Brockner **Expectancy theory (Vroom):** the belief that effort put in will result in performance and rewards. Persistence is evaluated with subjective expected utility calculations for possible successful outcomes in a forward looking (prospective) approach. More likely to escalate and persist if goal is within reach and highly valued. Feedback valued based on stability. Unstable causes like temporary setbacks, increase escalation. Prospective rational perspective, evaluating probabilities and influenced by bias of seeking information that confirms stance, and may ignore information that disconfirm ### Social causes Social dynamics can amplify escalation behaviours through mechanisms like peer pressure, impression management and modeling. Like need for being consistent in the eyes of others, and the implications of having an "audience" causing more pressure **Impression and reputation management (Goffman):** individuals are motivated to maintain favorable impressions. In escalation scenarios decision makers may persist to avoid admitting failure publicly, even at great cost. As explained by self-justifying theory. **Findings**: Staw demonstrated job insecurity increase escalation, as the need to protect their image in the eyes of superior was heightened. **Example**: Volkswagen emission scandal. Fear of reputational damage and desire for maintain image as leader in sustainability drove to fraudulent activity. Driven by self-presentation theory (Goffman) **Modeling:** social learning theory suggest individuals imitate the behaviour of others, especially in uncertain context. Making room for the normalization of escalation behaviours **Social dynamics/group conformity (Sleesman:** Group cohesion amplifies escalation due to conformity pressures (Sleesman) **Summary:** - Effects of an audience - Perceived need to be consistent - Competition with others - Cultural norms "sticking to your guns" - Justification of choice - Modeling - Impression and reputation management - Group conformity/cohesion **Authors** -------------------------------------------------------------------------------------------------------------- **Ku**: competition, cultural norms, conformity, justification of choice **Sleesman**: social dynamics and group conformity **Goffman**: motivated by maintaining positive impressions. Want to avoid public admitting of failure **Staw**: demonstrated job insecurity increased escalation in a need to protect image in eyes of supervisors ### Organizational causes Organizational structures and culture can also contribute to escalation **Structural inertia:** Staw noted that large-scale projects often involve significant "side bets", like infrastructure investments, creating institutional barriers to abandoning project. Resistance to admit failure at institutional level. **Cultural norms:** organizations emphasizing consistency or stigmatized failure indirectly foster escalation. On the other side, organizations with culture of learning from failure mitigate escalation tendencies (Brockner) **Completion bias (Drummond; Sleesman):** Near-completion projects are extremely prioritized due to the goal substitution effect, freeing up resources to pursue other goals. Overriding concerns about profitability. **Project closely linked to value and purpose of organisation** **Investments made and possible new departments made for project** **Summary:** - Structural inertia: institutional barriers with side investments - High stakes - Cultural norms - Completion bias - Values and purpose of organisation closely linked to project - New departments made and investments **Authors** ------------------------------------------------------------------------------------------------------------------------- **Bowen:** Decisions dilemma, not decision errors. Caused by incomplete information and lack of clear negative feedback **Sleesman:** sunk cost and personal responsibility as main cause for EOC ### Economic causes **Political pressure:** stakeholders fearing reputational damage **Penalty payments to sub-contractors:** being forced to pay the other party's legal costs **Low salvage value** **Redundancy costs** **Possible reputational costs of quitting** Prevention strategies ===================== ### Psychological interventions **Training to recognize biases:** Training decision makers to recognize cognitive biases like sunk cost and framing effects is essential **Dual process thinking (system 1 and 2) (Kahneman):** Encouraging a shift from emotional to analytical thinking. Like in dual-process theory with system 1 and system 2 thinking. Instead of escalating project to avoid admitting loss (system 1), reframing can help see potential and make calculated decisions for strategy (system 2) **Anticipate regret and opportunity cost awareness:** Anticipated regret and opportunity cost awareness mitigate escalation tendencies by shifting focus to alternative courses of action (Sleesman) **KU: prevention:** Shows difficulties with de-escalation and the complexity. Explains how learning to de-escalate is a complex process with research showing individuals have great difficulty in transferring knowledge from one setting to another. With fails to access stored knowledge, and when they do, they often access irrelevant information. Thus, individuals fail to access most useful reasoning and recalling most valuable information to solve new problems. Meaning, if individuals form deep understanding of one escalation situation and recall the lessons appropriately, they may not be able to reduce future escalation. As it is a cognitive learning process. - **Suggesting, "Learn from mistakes":** if individuals experience aversive and negative feelings after escalation situation, they may learn to de-escalate in the future, to avoid similar situations. - Further using **post-escalation regret as effective tool**, to reflect "what if?" thinking, learning from mistakes. Regretful experiences are more salient and memorable, leading to greater likelihood of recalling lessons learned. **Reframing of gains and losses**: Framing effects plays a pivotal role in preferences on risk taking in decisions by altering how individuals perceive and evaluate choices based on if outcomes are presented as gains or losses. Decision frameworks should reframe situations to reduce risk-seeking in domain of losses while encouraging calculated risk-taking in domain of gains. Prospect theory and Kahneman and Tversky demonstrate how the decisions are frame significantly impact whether individuals are risk-averse (erroneous abandonment) or risk-seeking (escalation of commitment). Link to system 1 and 2 thinking dual-process thinking approach. **Gigerenzer: Knowing the risk:** Understand probabilities and potential consequences to make informed and rational decisions on choice to withdraw or persist. **Gigerenzer: Knowing accountability as mitigating factor:** accountability influence decision making, as managers are more likely to avoid emotional biases (e.g. self-justification) when they know their actions will be scrutinized. Focusing more on objective and rational factors rather than emotional justification. Knowing their decisions will be analyze encourages reflections on own actions **Summary:** - Training to recognize bias - Dual process thinking (system1 and 2) - Awareness of anticipate regret and opportunity cost - Cognitive learning difficulties (Ku): post-escalation regret reflection and active learning from mistakes - Reframing of gains and losses **Authors** -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- **Sleesman**: awareness of anticipated regret and opportunity cost mitigate escalation tendencies **Kahneman and Tversky:** Framing effects plays pivotal role. To control prevention, system1 and 2 thinking, dual-process, approach can mitigate with prospect theory on how to understand framing in domain of loss or gains. Framing significantly impacts if a project becomes erroneous abandoned or escalated. Using decision frameworks that reframe situations to reduce risk seeking in domain of loss **Ku**: difficulties and complexities in learning to de-escalate because it requires cognitive learning and showed shifting of knowledge from one setting to another is difficult. When accessing information for solving new problems, irrelevant information is often recalled. If learning from one de-escalation situation correctly, they may not be able to transfer that to new situation to reduce future escalation. Learning from mistakes is more effective if individuals experienced negative feelings after escalation situation, and may learn better for future. Using post-escalation regret as proactive tool to learn from mistakes and reflect. As regretful experiences are more salient and memorable, resulting in greater likelihood of recalling lessons learned. **Brockner**: reframing decisions of gains and losses to alter how choices are perceived and evaluated. Adapting a dual-process theory (Kahneman) system 1 and 2 thinking process of reframe situations to reduce risk seeking in domain of losses while encouraging calculated risk taking in domain of gains. By reframing Brockner suggests decision makers can be encouraged to avoid emotional and impulsive decisions (EOC) and engage in more rational calculated risk taking in domain of gains **Gigerenzer:** knowing and acknowledging accountability reduces emotional bias as knowing scrutiny of decisions will happen and be assessed. Promotes objective focused and critical thinking. Additionality, having clear understanding of probabilities and risks makes informed and rational decision making on withdrawing or persisting. ### Organizational interventions **Structured decision making:** implementing decision benchmarks with milestones and exit strategies to evaluate objectively. Scenario planning and multistage evaluations as tools to counteract escalation and abandonment biases (Drummond; Sleesman; Bowen; Gigerenzer). Transparent decision-making processes and external audits reduce the influence of emotional biases **Role separation:** separating the roles of those who initiate and those who continue projects reduces personal attachment and self-justification pressures **Reward process, not outcomes:** judge decisions based on analysis and questioning assumptions rather than results. Recognizing some failures are beyond decision makers control **Information access and promote accountability (Drummond)**: ensure decision makers have access to clear and reliable information as possible to reduce ambiguity. Create strong accountability mechanisms like independent reviews and milestone evaluations to mitigate emotional bias like self-justification (Gigerenzer) **Summary:** - Role rotation and separation - Independent audits - Set limits and quitting points - Transparent decision making - External audits - Structured decision making - Benchmarks, milestones, exit strategies - Scenario planning/multistage evaluations - Reward process not outcomes - Feedback mechanisms - Clear project planning, knowing risks and accountability (Gigerenzer) **Authors** --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- **Gigerenzer**: access to clear and reliable information to reduce ambiguity. Create strong accountability mechanisms. Independent reviews and milestone evaluations **Drummond**: Reward process not outcomes, recognizing some failures are beyond decision makers control. Role separation from those who initiate project to the ones who continue, reducing personal attachment and self-justification **Sleesman, Bowen, Gigerenzer, Drummond:** structured decision making, benchmarks, exit strategies, milestone evaluations, scenario planning. With transparent decision-making process and external audits for heightened scrutiny and reduced emotional bias ### Cultural reforms **Normalize failure:** Promoting culture that normalize failure as learning and reduce stigma with leaving a project (Janis) **Open dialogue and groupthink prevention:** Encouraging open dialogue and critical evaluations to prevent groupthink (Janis) **Learning culture:** Organizations with culture of learning from failure mitigate escalation tendencies (Brockner) - Normalize failure - Open dialogue - Avoid groupthink and conformity - Learning culture **Authors** ------------------------------------------------------------------------------------------------------------------------------------------------ **Janis:** open dialogue and critical evaluation to prevent groupthink. Normalize failure as learning and reduce stigma with leaving a project **Brockner**: Foster culture with learning from failure **Gigerenzer:** ### [Erroneous abandonment avoidance (Drummond) ] Premature abandoning a project may stem from system 1 thinking fear of potential risks, but refarming the situation as a potential for gain can encourage calculated risk taking through system 2 thinking (Kahneman). Criticizes standard economic model of unbounded rationality **System 1 and 2 thinking as prevention strategy:** relevant approach to mitigate behaviours like escalation of commitment or erroneous abandonment by reframing situations effectively and adapting a multi calculated mindset for assessing prospectively for future probabilities and success, in accordance with rationality paradigm. Prospective rationality evaluate future utility outcomes as standard for ideal decision making, but is often influenced by biases that interfere with the logic. Dual-process approach with system1 and 2 thinking (Kahneman) approaches can mitigate the focus on biases and retrospective rationality. That can lead to more informed decision making to persist or withdraw, and avoid erroneous abandonment. **Emphasize accountability and structured frameworks:** for improving decision outcomes **Future oriented thinking**: decisions should priorities future costs and benefits over sunk costs Escalation arise from psychological drivers like sunk costs and self-justification, reinforced by ambiguous feedback and social pressure and reflects irrational persistence Erroneous abandonment shows the opposite error. Premature withdrawal driven by loss aversion and opportunity cost considerations Premature abandonment ===================== ### Drivers of premature abandonment (Drummond) Drummond synthesizes self-justification, prospect theory and real options theory for balanced frameworks that includes emotional and economic factors. **Loss aversion:** drawing on prospect theory, Drummond argue that the fear of making losses worse can drive premature exists, even from potential successful initiatives. Individuals prefer to cut their losses early rather than risking further investment (prospect theory) **Opportunity cost:** awareness of alternative investments heightens the scrutiny of ongoing projects, creating pressure to withdraw. Reflects a rational evaluation of current project offer the best return compared to alternatives **Perceived risk of persistence:** likelihood of future failures makes persistence seem unjustifiable **Intolerance of failure:** organizational/culture that stigmatize failure might pressure decision makers to quit rather than risk being associated with a failed project **Reluctance to renew budget:** stakeholders may refuse approvement of additional funding, forcing abandonment regardless of potential **Organizational shifts:** mergers, acquisitions, leadership turnover can deprioritize project leading to abandonment ### ### [Erroneous abandonment (Drummond)] Erroneous abandonment is a critique of the rationality of abandonment decisions. Suggesting that not all abandonment is justified and is not inherently rational. Some cases may be abandoned prematurely due to biases or misjudgments. Erroneous abandonment is the contrasting problem of escalation, where decision makers quit too soon rather than persisting. Must be evaluated in context of bounded rationality and decision environment. - Important to consider as premature abandonment highlights how abandonment can be rational and justified, but also erroneous if decisions makers fail to properly evaluate projects potential. - Linking to Gigerenzer, Drummond highlight that decisions are rational when they adapt to the constraints and uncertainties of real world. Where persistence may seem irrational under classic economic models, but rational from an uncertain environment perspective with ecological rationality **Loss aversion:** decision makers prematurely abandon projects to avoid further losses, even when persistence might lead to long-term benefits. Tied to prospect theory (Kahneman and Tversky) which explains risk-averse behaviour in domain of gains. **Ambiguity misinterpreted as failure:** project might appear to fail due to temporary setbacks or incomplete feedback, leading to premature withdrawal **Opportunity cost overestimated:** may overestimate the benefit of alternative investment **Intolerance to failure:** cultures that punish failure can lead to hasty decisions to abandon projects rather than risking further association with potential loss. +-----------------------------------------------------------------------+ | **Summary:** | | | | Drummond emphasize the complexities of decision making under | | uncertainty, criticizing behaviours in EOC to be irrational or | | rational, with either committing to escalation or withdrawing. But | | should rather be viewed through the perspective of bounded | | rationality and ecological rationality with taking contextual factors | | into account and the decision environment. Linking and referencing | | Gigerenzer to explain why decisions happen, rather than simply | | judging them against standard unrealistic economic models. From a | | different perspective, escalation of commitment can be viewed as | | rational when the decision environment includes ambiguous feedback or | | potential long-term rewards. Argues that escalation might reflect an | | adaptive response to incomplete information and unclear feedback. | | | | Persistence can be seen as rational when evaluated within the | | constraints of uncertainty and taking into account the decision | | environment, for example in high-risk R&D projects, persistence may | | be a calculated gamble that aligns with ecological rationality | | (Gigerenzer), and takes into account "real world" and don't follow | | unrealistic ideal standard economic models that does not consider | | decision making environment and individual contexts. | +-----------------------------------------------------------------------+ Critical analysis/ comparative analysis / text drafts ===================================================== ### General - Self-justification theory (Staw) explains escalation as a cognitive response to maintain consistency and image management and how individuals rationalize risk-seeking behaviour to protect self-image. Prospect theory (Kahneman and Tversky) includes loss aversion highlighting the emotional driver that makes individuals risk-seeking when they frame decisions in the domain of losses. As the psychological pain of accepting a definite loss wants to be avoided - Prospect theory (Kahneman and Tversky) complements self-justification theory by explaining the emotional driver behind the decision to escalate through loss aversion, making decision makers risk-seeking when they frame themselves in the domain of loss. Resulting in a reescalation even though the project is failing, they take risk to not admit definite loss. While self-justification theory (Staw) explains why individuals rationalize their risk-seeking behaviour to justify commitment to escalation despite sunk cost with cognitive processes and biases, resulting in sunk cost fallacy and irrational recommitment to escalation. - "Loss aversion explains why decision makers find it difficult to accept sunk costs as losses. The emotional discomfort drives risk-seeking behaviour as proposed in prospect theory (Kahneman and Tversky), and continue escalation and reinvest in failing projects to avoid pain of admitting failure" Critique: ========= ### Theories While these theories provide robust frameworks, they have limitations. **Self-justification theory** has been criticized for its inability to account for all instances of escalation of commitment and factors like economic curiosity, instead of purely emotional reasons. **Expectancy theory** has been critiqued for oversimplifying emotional complexities by assuming rational calculations (Brockner). **Prospect theory** complements self-justification but may fail to explain escalation driven by social or organizational factors ### ### Bowen, decision dilemma not decision errors: Argue escalation may not result from decision errors, but stem from decision dilemmas created by ambiguous feedback and uncertain condition and not a "syndrome of decision errors" proposed by Staw - Challenges assumption that decision makers knowingly "throw good money after bad" in escalation scenario - **Reinterprets escalation decisions as a rational response to ambiguous or incomplete feedback** - Suggesting **bounded rationality and lack of clear negative feedback** often lead decision markers to commit to course of action - Proposes escalation decisions might represent a rational response to ambiguous or incomplete feedback. - Critiqued Staw self-justification theory that highlights personal responsibility of prior investments overemphasize self-justification - Calling for clearer feedback standards to avoid mislabeling rational decisions as errors - A nuanced view of escalation contrasting with theories focusing solely on cognitive biases (e.g. sunk cost, overconfidence) or emotional drivers - Highlight need for structured decision making and cleared feedback mechanisms for prevention strategy (independent audits, benchmarks etc.) - EOC decisions are usually evaluate against economic maximizing utility, but can be criticized from the bounded rationality perspective that argues it's not possible to maximise outcomes, only satisfice, that individuals cannot maximize utility given constraints. Like cognitive constraints, incomplete information and time pressure (Brockner) ### ### Gigerenzer critique: irrational or rational? Critiques the classical economic model of humans as perfectly rational decision makers who maximise utility with complete information and logical reasoning, that assumes unbounded rationality. But cognitively this is impossible due to human limitations like bounded rationality - Critiques the model as unrealistic and links it with the fallacy of EOC as irrational. **Arguing that labeling EOC as irrational overlook the actual decision environmen**t in which these choices are made - EOC is seen as **irrational when judged against the standard economic** model - However, it might be **a rational response to the circumstances** or the environment of uncertainty that decision makers face - The perspective challenges the idea that humans should always behave according to the idealized standard against the standard economic model. **Instead, behaviour should be evaluated in context** **Introduces concept of ecological rationality:** which evaluates decisions based on how well they align with the task environment. - Ecological rationality means making decisions that are adaptive and sensible within the constraints and uncertainties of the environment, even if they don't appear rational by traditional standards - **In case of EOC:** decision makers might escalate because their environment offers incomplete information or ambiguous feedback, making persistence seem like rational gamble - For example, in high-risk industries, success may require persistence, and managers might continue investing based on their belief that overcoming setbacks is possible - Decisions are most rational (economically wise) when they are made with an understanding of real-word conditions - When probabilities and potential consequences are understood, to make better choices about persisting or withdrawing - **Ecological rationality recognizes** the constraints and uncertainties decision makers face in the "real world", and decisions should be evaluated **within its context not against unrealistic ideal** Examples: ========= - Vietnam war and United states in 60s and 70s (Brockner) - 2008 financial crisis ### Project Taurus (Drummond) Drummond analyzed the collapse of Project Taurus, an ambitious IT initiative by the London Stock Exchange. The case exemplifies how escalation can result from intersecting macro-level societal forces, meso-level organizational dynamics and micro-level decision making flaws. A good example that shows various causes of escalation to commitment in one case study - The Taurus project became a symbol of the Stock Exchanges authority and competitiveness, creating social and political pressure to persist. - Drummond argued that legitimacy building mechanisms like cost-benefit analysis, reinforced the decision to continue despite technically not possible. - Lost 400 million pounds - Stakeholders persisted because of sunk costs and organizational inertia **Causes:** - Role based behaviour constraining decision makers by their roles, failing to challenge the projects viability - Organizational rituals prioritizing compliance over critical evaluation - Feedback loops being ineffective due to poor communication and overconfidence among technical teams - Persistent optimism, despite gradual progress, made an illusion of eventual success - Overoptimism bias, overconfidence bias, illusion of control **Mitigation**: - Drummond highlights need for systemic interventions after studying escalation of commitment over micro to macro levels. - Such as independent reviews and dynamic feedback mechanisms ### France and Britian / Concorde: supersonic aircraft (Preston et al.) Government representatives failed to ignore sunk costs in France and Britain. Continuing to invest in Concorde, a supersonic aircraft. Long after it became clear that the projected would generate little return it still was in production because they had "too much invested to quit" ### Iraq and Vietnam war (Preston et al.) Argument made to stay on course in a war has been that too many lives have already been lost, and those lost lives will be in vain if the war is not won. Said in a speech by President Bush in 2005 for staying in Iraq war. "We owe them something". Same argument was made for Vietnam war, as more lives were lost, the harder it was to withdraw **Decision making theories and judgement** Week: 1, 2, 3 and 4 Checklist: ---------- - Theories that explain poor judgement and decision making - Rationality - Heuristics and biases - Illusion of control - **You need to be able to define, discuss and explain the core theories** - - **What biases is linked to what theory** - **Critical analysis of theory integration** - **Make list of how the theories explain or lead to poor judgement/decision making with main heuristics and biases** - **How does the 3 heuristics+biases affect poor judgement and decision making.** - **Make table with all information summarized** - **Add critique/critical analysis note on each topic/theory** - **Clean up prevention strategies with heuristics and biases directly linked to which ones they mitigate, in a table** - Definition - Critique / critical analysis - Impact of heuristics, biases and IoC - Example - Connection to other theories/topics - (prepare introduction with definition) Structure --------- ##### Introduction - Definition - ##### Main body **Critical analysis:** - **Critical analysis to poor judgements** caused by heuristics and biases: Gigerenzer; Drummond case study on Barings bank and ecological rationality, and Artinger: reframing heuristics and viewing them as tools in specific contexts. Seeing the advantages of heuristics - Advocating for adopting heuristics as tools for navigating complexity, rather than strictly optimizing theories. More nuanced perspective - **Theory integration:** **Time perspective theory** (Boyd) influence on EoC and decision making. Argue past orientation create dual impact. Erroneous abandonment through excessive risk aversion (loss framing, anchoring, vividness) and escalation through justifying sunk cost and overconfidence in future outcomes with retrospective rationality limiting ability to consider future outcomes (sunk cost fallacy, confirmation bias, IoC). Shows the behaviour in cognitive theories with constraints: prospect theory (Kahneman and Tversky), rationality paradigm, bounded rationality (Simon) - Drives both erroneous abandonment and escalation by skewing perceptions of future gains and losses. - **Theory integration: Naturalistic decision making (Klein)** - Use NDM to critique rationality models (especially prescriptive), emphasis focus on real-world and ecological rationality - NMD allows us to reject assumptions by rational models, in a critical and pragmatic framework for understanding decision making under uncertainty. - Reframe uncertainty, aligned with prospect theory, by framing of data, and not necessarily the absence of data Authors: -------- **Main authors on topic:** - **Gigerenzer** - **Drummond** **General** - **Artinger:** reframing heuristics - **Gigerenzer:** why heuristics and reframing - **Drummond**: 7 judgmental traps framework for cognitive biases and case study **Rationality authors** - **Smith**: Rational choice theory - **Simon:** Bounded rationality - **Kahneman and Tversky:** Prospect theory - **Kahneman**: Dual process theory **Decision making theories** - **Kahneman and Tversky:** heuristics and biases - **Boyd:** time orientation theory - **Klein**: naturalistic decision making - **Langer**: Illusion of control - **Staw**: EoC - **Janis**: Groupthink / group dynamics Overview: --------- ##### Rationality models **Benchmark for understanding deviations in decision making** **Prescriptive:** - Rational choice theory (Smith) - Expected utility theory **Descriptive:** - Bounded rationality (Simon) - Prospect theory (Kahneman and Tversky) - Dual process theory (Kahneman) - ##### Theories: explaining poor judgement and decision making Theories for insight on poor judgement and why decision-making deviate because of psychological and contextual factors - Heuristics and biases (Kahneman and Tversky) - Illusion of control (Langer) - Time perspective theory (Boyd) - Naturalistic decision making (Klein) - Escalation of commitment (Staw) - Groupthink and dynamics (Janis) ##### Heuristics and Biases: Heuristics explains deviations from rationality models, but is not inherently bad, but can lead to cognitive biases significantly influencing decision making - **Availability heuristics** - Overestimation bias - Recency bias - Vividness bias - **Anchoring and adjustment heuristic** - Anchoring bias - Confirmation bias - Framing effect - **Representativeness heuristic** - Base rate neglect - Stereotyping - IoC - Overconfidence - Availability bias - **Illusion of control** - Overconfidence bias - Planning fallacy - Confirmation bias - **Framing heuristic** - Loss aversion - Risk-seeking - Risk-averse Definitions and critical analysis: ---------------------------------- **"Decision":** - Difficult to define - **Most common:** To make a judgement regarding what one ought to do in a certain situation after having deliberated on some alternative courses of action (Ofstad) - The manage is the person who decided among alternative choices. They must decide which choice they believe will lead to a certain desired objective or set of objectives **Decision making process:** - A series of steps, starting with information output and analysis and reaching a resolution, from a selection of several available alternatives (Eilon) - A decision is the process of making a choice between two or more alternatives in order to arrive at a conclusion or course of action. Typically involving assessing available information, considering potential outcomes and selecting option that best align with desired goal or objective **Theory integration: Time perspective theory, escalation of commitment, prospect theory, rationality paradigm:** - Past-oriented decision making that relies on memories and retrospective rationality can lead to erroneous abandonment of potentially viable projects. Happening when individuals focus too heavily on past failures or negative experiences, creating aversion to risk or innovation. - **Foundational framework for understanding behaviour by explaining how time orientation shapes decision making and biases, by contextualizing the reasoning or behaviour behind EoC, erroneous abandonment and framing effects** - Amplified by loss aversion and prospect theory. Reinforcing availability heuristic and anchoring bias with vividness bias and overconfidence bias in one's evaluation and decision - Time perspective theory reflects bounded rationality with decisions shaped under cognitive constraints. As a result of loss aversion and avoiding loss - Alternatively, can explain EoC and escalation by reinforcing sunk cost with retrospective rationality, not considering future possibilities or potential gains. Resulting in confirmation bias, framing bias. - Including present framing for escalation, lacking to consider past or future probabilities - Reflecting cognitive constraints as shown in bounded rationality - **Past-orientation** influences decision maker by anchoring to prior experiences, amplifying biases like availability, vividness and loss aversion. That may lead to erroneous abandonment with skewed evaluation of past experiences or escalation of commitment where sunk cost justify further investment - **Cognitive frameworks like prospect theory (Kahneman and Tversky), bounded rationality (Simon) and dual process theory (Kahneman)** explain these behaviours by highlighting cognitive biases **Naturalistic decision model (Klein)** - While NDM provide valuable insight on decision making in real world applications, it also reveal inherent risks tied to intuition and context dependency. These vulnerabilities highlight the need to balance intuitive strategies with structured approaches (e.g. scenario planning, bias awareness, external audits) to reduce errors in high-stakes, unfamiliar or ambiguous situations Possible questions: ------------------- - How illusion of control, heuristics and biases and rationality models interact to explain poor decision making and judgement. Especially in poor or uncertain outcomes - The relationship between foundational theories of decision making 1. Critically evaluate how the interplay of rationality models, heuristics and biases, and the illusion of control contributes to understanding poor decision-making and judgment in uncertain environments. Use examples to illustrate your discussion 2. Critically assess how cognitive biases, such as the illusion of control, challenge the assumptions of rational decision-making models. Discuss the role of heuristics in this context and provide real-world examples to support your analysis Glossaries: ----------- **Utility**: - Reflects the individuals personal preferences and priorities. Its subjective based on needs, desires and circumstances. Fundamental concept behind rationality, that individuals choose options to maximise utility like satisfaction or benefit **Homo-economicus:** - Theory for decision making norms and self-interest driven to maximise utility **Rationality models:** - Decision theories main concept showing the nature behind rationality. With what principles guides and evaluates a decision to a conclusion. - Prescriptive theory and descriptive theories - Rationality gives the foundation for understanding deviations in decision making (Heuristics and biases) **Rational choice theory (Smith):** - Early prescriptive rational model, assuming individuals are rational agents making decisions to maximise utility based on self-interest, preferences and benefits. Assuming perfect information access, clear self-interest, able to weigh options to calculate subjected utility value - Foundation theory but limited and critiqued as unrealistic - However, is a robust foundation theory and is widely used in various industries. Politics, economics and criminology as benchmarks and baselines for understanding behaviours **Bounded rationality (Simon)** - Critique and extension of RCT (Smith) suggesting humans are limited by cognitive processing, limited information and time constraints. Challenging notion of full rationality and theory on homo-economicus, assuming perfect condition decision making and rationality - Shifting focus from maximizing/optimizing to satisficing, based on bounded rationality and decision making - Introduce concept of heuristics, mental shortcuts to ease everyday decision making, in a system 1 thinking system (Kahneman) **Prospect theory (Kahneman and Tversky)** - Also known as loss aversion theory, shows how RCT and bounded rationality model is undermined by heuristics and biases and framing effects - Prospect theory explains how people actually make decisions, rather than how rational agents would make decisions - Explains how people make decisions based on framing effects in uncertainty and risks, and assess probabilities in either domains of loss or gains - **Loss aversion** explains this, on how we prefer to avoid potential loss than risk potential gain - Avoid potential loss, rather than risk potential gain - So peoples decisions are influenced by the framing effect, skewing or distorting the rationality, by weighing losses higher than gains - Overweighing small probabilities with distorted assessment of values and probabilities. Using reference points to decide have options are framed (e.g. current wealth) - Connecting to rationality paradigm, with retrospective rationality and strongly influenced by anchoring bias - **Loss aversion:** losses are felt more strongly than equivalent gains - **Framing effects:** decisions are influenced by how options/probabilities are frame (gains or losses) - **Probability distortion:** people emphasize small probabilities and downplay large probabilities **Dual process thinking: System 1 and 2 (Kahneman)** - Framework for understanding two distinct thinking systems for decision making - **System 1:** fast, emotionally driven and immediate focus on instant utility, used in everyday decisions and life. Fast and intuitive - **System 2:** slow, analytical and deliberate, taking a step back and evaluating more clearly - System 1 thinking activates interest and initial thought processes, but then system 2 thinking pulls back and consider more analytical calculations and outcomes **Time perspective theory (Boyd)** - Time orientation determines how decisions are made and influences perception of risk, behaviour and utility. - **Past framing:** use past memories and retrospective rationality, less likely to take risks and try something new (Linking to EoC and RP, reinforcing sunk cost fallacy or erroneous abandonment of project) - **Present framing**: base decisions on here and now. Hedonistic or instant utility - **Future framing:** goal oriented, basing decisions on expectations. Delayed gratification (prospective rationality) - Time perspective theory (Boyd) can support and explain aspects of escalation of commitment behaviours using rationality paradigm framework as benchmarks for rational decision making. Also linking with prospect theory on framing **Naturalistic decision making (Klein)** - **Linking with ecological rationality (Gigerenzer)** - **Align with dual process: system 1 intuitive decision making**, but with experienced intuition from long term syst

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