Escalation of Commitment
Why companies don't stop bad investments – and thereby destroy capital
Many investment decisions are not suboptimal because the original idea was wrong.
They become suboptimal because a project continues to be financed despite clear warning signs.
This pattern is particularly critical in CapEx processes: machinery, equipment, production lines or location investments tie up capital in the long term, are only reversible to a limited extent and generate high follow-up costs.
As part of our analysis of decision quality, we have identified escalation of commitment as one of the key mechanisms that systematically leads to misallocations.
Definition
Escalation of commitment describes the tendency to stick to a decision and invest additional resources even though new information suggests that the project no longer makes economic sense.
Instead of abandoning or changing course, the project is continued, refinanced or expanded.
Why escalation occurs
The problem is rarely purely technical. It is often psychological and organisational
- Loss aversion. : Cancellation is seen as a certain loss, while continuation is seen as an opportunity to avoid the loss.
- Reputation pressure : Those who have initiated a project fear losing face if it is stopped.
- Sunk cost thinking : Capital already invested is mentally used as an argument for further investment.
- Career and political logic : Projects become symbols, not cash flow objects.
- Status quo bias : Continuing feels easier than a tough reassessment.
How escalation of commitment manifests itself in CapEx
Typical signals in practice :
- Budget overruns are rationalised as "temporary"
- Delays do not lead to cancellation, but to "acceleration budgets"
- New risks are dismissed as "one-off effects"
- Expected cash flows are "adjusted" retrospectively to stabilise the decision
- Stop criteria exist but are not applied consistently
Economic consequences
Escalation of commitment is not an isolated error but a multiplier :
- Capital remains tied up in projects that no longer deliver value
- Opportunity costs rise because better alternatives are displaced
- Portfolio quality declines because resources no longer flow into the best combination
- Management capacity is invested in rescue narratives rather than value enhancement
The structural dimension
Viewed in isolation a project may still appear "salvageable".
In a portfolio context, however, the decisive factor is whether this project displaces capital from higher-value alternatives.
As the number of parallel projects increases, the scope for decision-making grows exponentially. In this complexity, escalation mechanisms are reinforced because decisions are no longer made on the basis of the overall system, but on the basis of historical ties.
What decision quality means here
Escalation of commitment cannot be avoided by appeals. It requires decision architecture :
- clear termination and re-evaluation criteria
- separation of project responsibility and portfolio decision-making
- transparency regarding opportunity costs
- portfolio view instead of individual project logic
Conclusion
Escalation of commitment is a psychologically plausible pattern – but economically costly.
If you want to allocate capital efficiently, you not only have to evaluate projects, but also recognise the mechanisms that stabilise bad decisions.
