Are you stuck in a job that you’re not happy with? Disappointed about your compensation or lack of growth potential in your company? Maybe you’re not satisfied with the relationship you have with your direct supervisor or boss.
Have you ever been entangled in a toxic, abusive, or unloving relationship, but for some reason you continued to stay?
Have you ever continued to purchase a stock even as you watched it rapidly decline in value, hoping it would recover and create gains for you instead of a loss?
Welcome to Escalation Land. It’s a place where we’re constantly trying to convince ourselves and others that we’re rational decisionmakers. We do so by staying consistent with our actions, even when presented with new evidence that changes the scenario and renders our initial decision a failure.
The logic behind this illogical behavior can be explained through a theory called “Escalation of Commitment,” posited by Barry M. Staw, and further enhanced by Kahneman and Tversky with their research on loss aversion and Noble-prize winning “Prospect Theory.”
According to Staw’s research, when we invest our time, resources, and energy into something in which the result turns out to be negative, we don’t want to accept that we’ve suffered a loss or failure. We continue the same course of action, finding reasons to justify our initial decision-making process, which ultimately leads us to justify continuation of the loss.
Kahneman and Tversky continued with the reasoning that people are afraid to lose, and if a scenario is framed in a positive manner, a person will become more risk seeking in order to avoid a potential loss.
How often do we see this in our current society or political environment when two opposing sides debate a specific topic? People are reluctant to lose and therefore are unwilling to conduct meaningful debate that would lead to understanding or compromise. Instead, they take an all-or-nothing approach, which leads to argument, conflict, and division.
Does that make sense?
In Rational Land, we realize when things have changed, that we’ve lost, and that we must cut our losses and move on with our lives. In our complex world, changes occur at a rapid pace. We must adapt to new information, changing scenarios, and unforeseen events. If we don’t, we could suffer catastrophic consequences.
My own personal experience with escalation of commitment drove me to lose a significant portion of my wealth during the internet bubble of the late ‘90s that preceded the stock market crash between 2000 and 2002. Having committed mentally, emotionally, and financially to my various stock purchases, I couldn’t accept the obvious evidence in front of me. Instead, I escalated my commitment by justifying my previous decisions, making myself believe some stocks were undervalued and others that I’d purchased at higher prices would recover.
Not wanting to lose, I kept investing more money into a losing situation. I refused to acknowledge the error in my thought process.
The trend in the market was stating something different. Between March 2000 and October 2002, the NASDAQ composite stock market fell 740 percent from its peak. You can only imagine the pain this caused. This was a serious learning lesson for me.
To avoid getting caught in an escalation of commitment similar to mine, I encourage you to follow these rules of thumb:
- First, evaluate your situation when you’re faced with negative feedback. Critically think and analyze the scenario for new information.
- After evaluating the new information, write down what has changed or what’s different.
- Look for alternative solutions to any problems or setbacks.
- Lay out your alternatives and list out the pros and cons to each of the choices. Then review the reasons and identify whether they’re logical and objective or not.
- Before making a decision, evaluate your goals and values.
- Critically think about what your initial objectives were and if they’re still the same.
- Align your values and goals, then adapt to the changes. You can decide to stay the course, cut your losses, or move toward another alternative solution.
Your decision should create a more favorable outcome and a higher probability of success.
