What is Escalation of Commitment?
Escalation of commitment is a psychological phenomenon where individuals or organizations continue to invest time, money, or resources into a failing endeavor due to the prior investments they have already made. This is often guided by a desire to avoid wasting those prior investments, even when it becomes clear that the project is unlikely to succeed.
Overconfidence: Entrepreneurs often believe strongly in their
business ideas, which can lead to overestimating the likelihood of success.
Sunk Cost Fallacy: The misconception that past investments justify continuing the project, even when future benefits are unlikely.
Social Pressure: Expectations from
investors, employees, and even family can push entrepreneurs to persist.
Emotional Attachment: Personal passion and emotional investment in the project can cloud judgment.
Regular Reviews: Conduct periodic reviews of the project's progress and viability.
Objective Metrics: Use
Key Performance Indicators (KPIs) to assess the project's health.
External Feedback: Seek input from
advisors or
mentors who can provide an unbiased perspective.
Scenario Planning: Consider what actions you would take if you were starting from scratch today.
Set Clear Criteria: Establish predefined criteria for continuing or terminating a project before significant investments are made.
Flexible Mindset: Be willing to pivot or change direction based on new information.
Separate Personal and Business Goals: While passion is important, ensure that business decisions are based on data and
market realities.
Learn from Failures: View setbacks as learning opportunities rather than reasons to double down on a failing strategy.
Examples of Escalation of Commitment in Entrepreneurship
Many well-known entrepreneurs have faced issues with escalation of commitment: Quirky: This
crowdsourced innovation platform continued to invest in unprofitable products due to initial success, ultimately leading to its downfall.
Theranos: Despite mounting evidence that its technology was flawed, the company continued to seek funding and expand its operations.
Conclusion
Escalation of commitment is a significant risk in entrepreneurship, driven by factors like overconfidence, sunk cost fallacy, social pressure, and emotional attachment. Entrepreneurs must be vigilant and adopt strategies to recognize and avoid this trap. By setting clear criteria, maintaining flexibility, and seeking external feedback, they can make more objective decisions that enhance their chances of long-term success.