The effects of sunk cost and project completion on information technology project escalation

Abstract

Information technology (IT) projects can fail for a variety of reasons and in some cases can result in considerable financial losses for the organizations that undertake them. One pattern of failure that has been observed but seldom studied is the runaway project that seems to take on a life of its own. Prior research has shown that such projects can exhibit characteristics of the phenomenon known as escalating commitment to a failing course of action. One explanation of escalation is the so-called sunk cost effect which posits that decision-makers are unduly influenced by resources that have already been spent and are therefore more likely to continue pursuing a previously chosen course of action. A competing explanation, labeled the completion effect holds that decision makers escalate their commitment as they draw closer to finishing the project. In order to understand more about the relative effects of sunk cost and project completion information, a role-playing experiment was conducted in which business students were asked to decide whether or not to continue funding an IT project given uncertainty regarding the prospects for success. Three variables were manipulated in the experiment: the level of sunk cost, degree of project completion, and the presence or absence of an alternative course of action. Results showed that subjects willingness to continue a project increased with the level of sunk cost and the degree of project completion, but that subjects were more apt to justify their continuation on the basis of sunk cost. As theory would predict, the presence of an alternative course of action had a moderating effect on the escalation that was observed.