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Escalation of Commitment After Costs are Sunk

Published December 22, 2008 10:22 AM by Brian Garavaglia

None of use like to loss on something. Having a financial, psychological or emotional investment in something makes it that much more difficult to walk away from. This is a common occurrence in the daily lives of many individuals. In health care the same issues are found. We make business investments and sometimes we get the business. 

In long-term care this is often found. We make a decision, an investment ensues, and on many occasions the correct decision has been made. However, what happens when the decision is made, an investment ensues, and then it does not work out. How long do you stick with a decision and continue to add more costs to an already unsuccessful project?

First, we have to understand the concept of sunk costs. This is a cost that has already been incurred. Money has been invested in a project and this money cannot be brought back. So the cost is sunk. Therefore, with the cost being sunk your decision to continue a project needs to be based on what can be anticipated in the future. With a sunk cost, determining whether a decision needs to be made for a project to continue needs to be held in abeyance. Past costs or costs that have already been spent now become irrelevant to any future decision. 

The decision now must be based on what costs will be incurred in the future versus what positive results from the project you anticipate receiving. The sunk cost becomes irrelevant for determining whether you want to continue with the project since what has been lost is no longer retrievable and your decision currently has to be focused on whether it is viable from this point on to continue with a project that will be viable. 

It is always difficult to make a decision about whether a project should be discontinued when it is not currently doing well. However, many individuals muddle the decision by bringing sunk costs into play, which makes it even more difficult to determine what decision to make. When costs are sunk, for all intent and purposes they become irrelevant to your decision for the future. 

However, this type of rational thought is easier said then done. One of the reasons is that we often have psychological and emotional costs tied to our financial costs.  Therefore, even when we attempt to disengage from the material financial loss, it becomes quite difficult to also disengage from our psychological and emotional commitments that are associated with our sunk financial costs. As many who work in long-term care administration read this they can probably appreciate this predicament.   

Because decisions in which financial investments have been made are also fueled by psychological and emotional investments, it becomes difficult to disengage from a failing proposition when the emotions of the person and the psychological needs of the person are involved with the decision. Long-term care administrators, wanting to justify their position and definitely not wanting to say they made an investment for naught will at times engage in the escalation of commitment phenomenon

This leads many to continue to commit to a course of action, even when it is not successful, due to the sunk costs that have already been incurred. As we mentioned above, the determination of whether a course of action should be continued cannot take sunk costs into account since they already are spent and are no longer retrievable. Yet, with the escalation of commitment, individuals fail to look at the course of action based on future benefits minus costs, but on what has retroactively been already sunk into the project. 

The psychological and emotional factors that are driving this phenomenon are great. Psychologically, not wanting to see oneself as leading a failed project and emotionally being closely tied to the project, as well as engaging in self-justification, where they are attempting to convince themselves that they made the correct decision are primary forces motivating many administrators to continue with the wrong course of action. All of us like to save face and in an attempt to not loss face, we escalate our commitments in the hope that they will finally pay off and achieve the goal that we set out to accomplish. However, we can see how this can be a pernicious thought pattern. Yet, how many of us have been caught in its grasp, where we attempted to save face and continue to escalate our commitment. Being wrong is hard to swallow and even more difficult to admit to others. 

I hope that the person reading this has gained a better understanding of sunk cost and escalation of commitment. Both work hand-in-hand, and they can impact on the decisions that many long-term care administrators make. Financially, sunk costs are all too often factored into decisions regarding future investments. This can become imprudent for decision-making. 

However, even more problematic is extricating the emotional and psychological investments that we incur in many courses of actions that we hold firm to in a stubborn, pertinacious manner. If we were robots, devoid of these processes, we could understand how we could extricate ourselves from sunk costs. However, because we are human beings, vested with these important processes, those who work with important business decisions, including those found in long-term care administration, have to be particularly sensitive to how these factors can lead to improperly engaging in an escalation of commitment. 

                                 

posted by Brian Garavaglia
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About this Blog


    Brian Garavaglia, PhD
    Occupation: Long-term care administrator
    Setting: Sterling Heights, Mich.
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