Another distortion that creeps into decisions in practice is a tendency to escalate commitment when a decision stream represents a series of decisions. Escalation of commitment refers to staying with a decision even when there is clear evidence that it’s wrong. For example, consider a friend that has been dating his girlfriend for about 4 years. Although he admitted to you that things weren’t going too well in the relationship, he said that he was still going to marry her. His justification: I have a lot invested in the relationship!
It has been well documented that individuals escalate commitment to a failing course of action when they view themselves as responsible for the failure. That is, they “throw good money after bad” to demonstrate that their initial decision wasn’t wrong and to avoid having to admit they made a mistake. Escalation of commitment is also congruent with evidence that people try to appear consistent in what they say and do. Increasing commitment to previous actions conveys consistency.
Escalation of commitment has obvious implications for managerial decisions. Many an organization has suffered losses because a manager was determined to prove his or her original decision was right by continuing to commit resources to what was a lost cause from the beginning. In addition consistency is a characteristics often associated with effective leaders. So managers, in an effort to appear effective may be motivated to be consistent when switching to another course of action may be preferable. In actuality, effective managers are those who are able to differentiate between situations in which persistence will pay off and situations in which it will not.
Randomness Error: Human beings have a lot of difficulty dealing with chance. Most of us like to believe we have some control over our world and our destiny. Although we undoubtedly can control a good part of our future by rational decision making the truth is that the world will always contain random events. Our tendency to believe we can predict the outcome of random events is the randomness error.
Consider stock price movements. In spite of the fact that short term stock price changes are essentially random, a large proportion of investors – or their financial advisors – believe they can predict the direction that stock process will move. For instance, when a group of subjects was given stock prices and trend information, these subjects were approximately 65 percent certain they could predict the direction stocks would change. In actuality, these individuals were correct only 49 percent of the time about what you’d expect if they were just guessing.
Decision making becomes impaired when we try to create meaning out of random events. One of the most serious impairments caused by random events is when we turn imaginary patterns into superstitious. These can be completely contrived or evolved a certain pattern of behavior that has been reinforced previously. One manager says he never makes important decisions on a Friday the 13th, but in reality nothing can go wrong if a decision is taken. By coincidence the manager might have taken a decision on some 13th Friday which might not have worked well. Tiger Woods often wears a red shirt during the final round of a golf tournament because he won junior golf tournaments while wearing red shirts. It is just a superstition but actually Tiger Woods skills in Golf are winning him the tournaments and not red shirts. Although many of us engage in some superstitious behavior, it can be debilitating when it affects daily judgments or biases major decisions. At the extreme, some decision makers become by their superstitions making it nearly impossible for them to change routines or objectively process new information.