How to prevent competitive escalation in the minimal dollar auction paradigm

Abstract

Escalation of commitment, the tendency to increase one’s investment in a losing course of action even after negative feedback is well known for its adverse consequences. In this paper, we investigate a situation in which escalation of commitment occurs in the context of competitive settings. Based on Shubik’s (1971) original game, we introduce a ‘minimal’ dollar auction paradigm, which allows us to study competitive escalation in small anonymous groups in the lab. In three experiments, students and experienced executives bid more than 10 CHF for a prize of 10 CHF. In addition, we test two interventions to prevent competitive escalation: a ‘goal setting’ intervention, which has been successful in reducing classic escalation of commitment, is not effective in the competitive situation, whereas a ‘vicarious learning’ intervention prevents escalation successfully. The result is consistent with the assumption/theory of a cold-hot ‘empathy gap’, which impedes individuals from correctly anticipating their experience of the competitive situation before entering it.