Escalation of Commitment: An Experimental Study

Top managers are expected to be rational decision makers. Otherwise, a less than optimal allocation of limited resources results in a loss of competitiveness. Previous studies in accounting, management, and psychology provide evidences on the management's escalation of commitment to an alternative with negative feedback, which may cause suboptimal performances. The purpose of this study is to examine the escalation of commitment by managers. Firstly, it is examined whether managers exhibits such behavior. Secondly, the extent to which variables of individual responsibility, information asymmetry, and risk preference affect the level of commitment is examined. To achieve research purposes, a laboratory experiment is conducted. Analyses of data indicate that escalation of commitment persist in the face of the negative feedback. The higher the level of individual responsibility, subjects committed more resources to an investment project with a negative feedback. Information asymmetry significantly contributed to the level of commitment. Risk preference, however, was found to have little effects on the escalation of commitment. The results suggest that managers are exposed to the risk of escalating commitment to the suboptimal decisions. This study extended previous research by allowing subjects to make investment decisions for their own, and by clearly communicating negative feedback. Development of accounting information systems is needed to help management reduce escalation of commitment in the face of negative feedback.