Can Group Decision-Making Mitigate Propensity of Escalating Commitment?

Front. Bus. Res. China 2008, 2(1): 33–49 DOI 10.1007/s11782-008-0003-x RESEARCH ARTICLE LIU Zhiyuan, LIU Qing Can group decision-making mitigate propensity of escalating commitment？ ―An experimental research based on the prospect theory © Higher Education Press and Springer-Verlag 2008 Abstract Escalation of commitment is a well-known investment trap, which is irrational from an economic point of view but inevitable due to psychological factors. Based on a role-playing experiment, this paper intends to analyze the impact of different effects of the prospect theory on the tendency of escalating commitment in different decision-making processes, and discusses whether certain decision-making processes can mitigate the tendency of escalating commitment. Our empirical results indicate that groups with prior individual consideration can make better decisions involving effects of the prospect theory than individuals and groups. Keywords escalation of commitment, group decision-making, prospect theory 摘要恶性增资现象广泛存在于各种组织结构中，对社会的资源配置产生重大影响。从经济学角度看，恶性增资是非理性，不应该发生, 但从决策者心理角度看, 有其产生的必然因素。通过角色模拟实验, 分析前景理论的各效应在不同决策方式(个体决策、直接集体决策和先个体后集体决策) 下对恶性增资心理倾向的不同影响, 进而探讨采取特定的决策方式是否能够有效地对恶性增资倾向进行控制。结论表明, 先个体后集体的决策方式可以较好地规避前景理论效应。 Translated and revised from Zhongguo gongye jingji 中国工业经济（China Industrial Economy), 2007, (4): 13–20 LIU Zhiyuan ( ) School of Business, Nankai University, Tianjin 300071, China E-mail: [email protected] LIU Qing Department of Accounting, School of Business, Nankai University, Tianjin 300071, China E-mail: [email protected] 34 LIU Zhiyuan, LIU Qing 关键词恶性增资，集体决策，前景理论 1 Introduction Previous research(Staw, 1976, 1981; Bazerman et al., 1984) has found that individuals who are responsible for a previous decision tend to make increasing commitment to the previously chosen course of action even when the outcome of the previous decision turned out to be negative. This tendency (or phenomenon) is referred to as escalation of commitment, a common entrapment of investment. In practice, managers frequently meet this kind of decision-making dilemma. A survey by Keil et al. (2000) showed that there exists escalation of commitment in 38% of foreign IT projects. And in China, 93% surveyed managers admit their companies escalate commitment to a certain extent, and 56% managers among them acknowledge this phenomenon exists widely(Chow et al., 2000). Escalation of commitment wastes numerous resources, and makes enterprises lose opportunity to develop. The study of individual behavior in escalation has received increasing attention, yet the escalation phenomenon is likely to be even more important at the group level because of the widely consequential and pervasive nature of group decisions(Donaldson and Lorsch, 1983). Recent escalation of commitment research has focused on the theme that whether group decision-making can reduce escalating tendency. Building upon initial work by Staw(1976), Bazerman et al.(1984) undertook the first empirical examination of group decision-making in escalation dilemmas. Focusing on dissonance processes, they found that escalation of commitment occurred in both groups and individuals. A decision bias perspective(Neale et al.,1986) highlights that group have the capacity to view events by using multiple frames, and the nature of the decision making process of groups with prior individual decisions is such that it leads to less decisive outcomes. Whyte(1993) concerned the likelihood and degree of escalating commitment of individuals and groups. He found that group decision making amplified trends apparently at the individual level in terms of the frequency with which escalation occurred and its severity. Moon et al.(2003) provided compelling evidence of one reason why groups might sometimes escalate commitment more, and sometimes escalate commitment less, than individuals. The reason is that decision process leads to different forms of commitment, and prior consideration groups escalate their commitment more in progress (i.e., ongoing) decisions. We should not be surprised to find that similar ambiguity exists when comparing prior studies of how groups dispose escalation dilemmas. However, a close contemplation of group decision-making studies reveals that differences in the process by which groups reached decisions may An experimental research based on prospect theory 35 help explain the different findings, generally within the group decision making literature, and specifically within our focal area of escalation (Moon et al., 2003). In some previous literatures, group members privately considered information about a problem and formed individual judgments before meeting as a group (e.g., Smith et al., 1998; Stasser, 1992; Whyte, 1993). In other studies, groups are exposed to problems for the first time as a group (Bazerman et al., 1984). Members in a no-prior-consideration-decision process enter a group discussion without any previous commitments or positions. Consequently, the dynamics of the group decision may be markedly different. Decisions on whether to abandon or continue a project are made solely within the group setting. Moon et al. (2003) were cognizant of this problem, and their study found that group decisions are affected in systematic ways depending on whether or not there was individual consideration of the problem before meeting as a group, but their topic focused on the incrementalism and adoption. Undistinguishing between with or without individual consideration makes these studies conclude differently to some extent to group decision-making in escalating commitment field. Further more, these findings were made in the western context, and most respondents attending experiments hold western culture. Numerous evidences indicate that different folks prefer different value and risk opinion about their jobs. Cultural factors may influence the applicability of the above findings of escalating commitment in China. The remainder of the paper is organized as follows: In Section 2, we introduce a theoretical framework and propose hypotheses. We then present our experimental design and method in Section 3. The analysis of data and experimental results are reported in Section 4. Lastly, Section 5 provides concluding remarks. 2 Theory and hypotheses There is a good deal of theoretical controversy concerning the explanation of escalation(Brockner and Rubin, 1985; Staw and Ross, 1987; Brockner, 1992; and so on). Some of the initial conceptual and empirical work on escalating commitment embraced self-justification as one of the most important alternative interpretations, but very little research has been conducted. Whyte(1986) suggested that prospect theory may provide a more compelling explanation of escalating commitment than does self-justification theory. Prospect theory explains individuals’ risk-taking propensity under conditions of uncertainty (Kahneman and Tversky, 1979). Although prospect theory is concerned strictly with individual choice behavior, it is possible to elevate prospect theory to the 36 LIU Zhiyuan, LIU Qing group level of analysis. Whyte(1993) extended the theory to the group level in order to address the absence of a broadly applicable explanation for escalation at the group level of analysis. Main concepts used in prospect theory include sunk cost effect, framing effect, mental accounting, loss aversion, etc. 2.1 Sunk cost effect Sunk cost is the cost that has been initially invested and cannot be redeemed from the loss. Studies have consistently demonstrated that decision makers often consider past expenditures when making current-utility-based decisions(Staw, 1997). In prospect theory, sunk cost is relevant only insofar as it influences the framing of decisions, and not enters into the computation to determine whether the benefits of a particular course of action exceed the costs. But the existence of a negative balance will result in the subsequent decision being framed as a choice between losses, just as the existence of a positive balance will tend to result in the subsequent decision being framed as a choice between gains(Whyte, 1986). Prospect theory implies that sunk costs are incurred in a losing course of action, and these costs still possess economic value in their original use or have yet to be fully depreciated, and subsequent decisions concerning whether to continue the initially chosen course of action are likely to be framed as a choice between losses(Whyte, 1993). If gives up, the manager will suffer certain losses, and if escalate, the manager may lose more but may retrieve prior cost. So when the prior investment fails, the impact of the sunk cost is such that decision-maker has propensity to behave, whether he is responsible for the initial investment’s failure or not, in a risk-seeking way to escalate the commitment, to avoid wasting invested resources(Arkes and Blumer, 1985). Therefore, we hypothesize that: Hypothesis 1a Because of the impact of sunk cost, decision-makers will escalate their commitment to a failing projects. Part of members may “free ride” in decision-making when a group without prior individual consideration makes decisions. Members can follow their colleagues with strong initial preferences. Then the group thinks like a “collective individual”, and is controlled by some strong individuals. The phenomena are called group polarization. The fact that nobody is responsible under collective responsible rule makes decision-makers in group without prior individual consideration prefers risk more than individual decision-makers. For group

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