Explaining Escalation Of Commitment In Information Technology Investments

Escalation of commitment to a failing course of action has been studied in the IT literature, where IT managers are shown to continue committing resources to bad project instead of terminating them. We make a case that escalation of commitment can be considered as the problem of not exercising an option to abandon a project at the correct (optimal) time. The value of a real option is time sensitive, and it’s realized value depends on the time of its exercise. IT literature suggests that managers may not be rational in their decision-making. We examine the implications of IT managers being bounded rational agents with time-inconsistent preferences, who apply intuitive thinking in managing abandonment option. Through modeling the option exercise decision with decision maker’s time inconsistent preferences, we illustrate conditions under which managers with different time preferences might behave in a similar fashion or differently with respect to option exercise.