An economic perspective on escalating commitment

Abstract

This paper highlights the significance of escalating commitment to strategy formulation, briefly examines behavioral explanations of escalating commitment to a losing course of action, and finally proposes an economic theory of the escalating commitment phenomenon. An example of escalating commitment to an outdated technology is presented. It is shown mathematically that there are economic justifications for escalating commitment to a failing strategy. Strategic implications for the first move advantage and for the U.S. steel, auto and semiconductor industries are discussed.