Escalation in Decision-Making: Behavioural Economics in Business

by Drummond,Helga

• ISBN13: 9781409402367
• ISBN10: 1409402363
• Edition: 1st
• Format: Hardcover
• Copyright: 2011-05-28
• Publisher: Routledge

Summary

Amongst the most important decisions business or project owners may ever have to make are those that arise when a venture seems to be faltering. Do they persist and hope that things will get better or do they cut their losses? Persistence involves a risk of throwing good money (or other resources) after bad, whilst exiting may not be an easy option, as owners may feel they have too much invested to quit now. In Escalation in Decision-Making Helga Drummond reveals why social scientists believe that owners may not respond rationally to such predicaments. That is, instead of exiting when the odds are clearly stacked against them, they may well re-invest and end up compounding their losses - a phenomenon known as escalation of commitment. The author also introduces the concept of entrapment, a variation whereby decision-makers passively drift towards eternity with the passage of time as the cost of changing direction becomes too high. The big questions posed in this book are: What drives escalation? Why do some owners quit sooner rather than later, whilst others persist virtually until the bailiffs arrive?" What can we learn from owners' mistakes? What makes newcomers believe they can succeed where others are conspicuously failing? These questions of behavioural economics are answered here by way of a narrative that analyses decisions made by market traders facing economic extinction. Once upon a time, becoming a market trader was an almost guaranteed route to prosperity. Indeed, many highly successful entrepreneurs started their careers in markets. Most notably, the retail chain M&S was founded by Michael Marks from a stall in Leeds Market. Now market traders are disappearing at the same rate as public houses in the UK. New traders fill gaps but few survive for long. This analysis is rich in case studies involving real business decisions and dilemmas. Although the market traders that feature in the stories told here are clearly small entrepreneurs, the ubiquitous phenomenon of escalation at the heart of these stories is widely relevant to practitioners such as project managers in large organizations and to those responsible for managing risk in many situations. This timely book provides an accessible introduction to the application of what for many is a new area of theory against a background of growing interest in behavioural economics, now being researched and taught in universities and increasingly attracting the attention of business practitioners.