Debiasing escalation of commitment: the effectiveness of decision aids to enhance de-escalation

Abstract

Decision-maker’s tendency to continue with a failing course of action due to sunk costs is a costly bias and failure of managerial decision-making. It is therefore of great interest to find effective countermeasures that address the sunk cost effect, which is one important driver of people’s escalation of commitment behavior. This paper examines the effectiveness of different types of decision aids that aim to reduce the sunk cost effect. In a series of experiments, we first demonstrate that the sunk cost effect even occurs although new unequivocal information on the project’s prospects suggests to change the course, making this bias a robust decision-making error. Then, the effectiveness of different types of decision aids, i.e., warnings and instructions, is tested for de-escalation purpose. De-escalation was found in dependence of the type of decision aid: Using simple warnings that label sunk costs as such and warn about the sunk cost effect was not effective in reducing people’s tendency to continue a failing course of action; whereas specific instructions that alert the decision-maker how to apply normative decision rules for incremental investment decisions effectively reduced decision-maker’s escalation of commitment. But, our findings also indicate that decision-makers have to rely on the instruction at least to a moderate degree. In this regard, we show that decision aid reliance is determined in a sunk cost situation by decision-maker’s internal feeling that prior resources could have been wasted in case of project termination, as they suffer to admit that prior—sunken—investments cannot be recouped anymore. Consequences for management accounting practice are discussed.