A developer received financial backing for a new business financial center along a derelict section of the waterfront, a few miles from the current downtown area of a large European city. The idea was to build several high-rise structures, attract large businesses to those sites, and have the city extend transportation systems out to the new center. Over the next decade, the developer believed that others would build in the area, thereby attracting the regional or national offices of many financial institutions. Interest from potential business tenants was much lower than initially predicted and the city did not build transportation systems as quickly as expected. Still, the builder proceeded with the original plans. Only after financial support was curtailed did the developer reconsider the project. Using your knowledge of escalation of commitment, discuss three possible reasons why the developer was motivated to continue with the project.

Escalation of commitment occurs when an individual repeats a bad decision or continues to allocate resources to a failing cause of action. There are four main causes of escalation of commitment: 

Self-justification effect. 
Canceling the development may have suggested that the developer (who originally proposed and championed the project) made a bad decision whereas continuing the development would be vote of confidence towards his/her leadership ability. The developer also may have continued the project if he/she had linked it to the company’s future success. To reverse this position would convey an image of inconsistent leadership.

 Self-enhancement effect. 
The developer likely screened out or neutralized negative information because of a selfperception of being above average. In addition, the project was clearly high risk (redesigning a significant portion of the city), so the developer seems to exhibit self-enhancement in the form of perceiving a higher probability of success in spite of these risks. In other words, decision makers falsely believe that luck is on their side, so they invest more in a losing course of action.

 Prospect theory effect. 
The discomfort associated with losing money on this project may have outweighed the desire for gains. In other words, knowing that stopping the project would mean certain loss, he/she was willing to go to great lengths to avoid this, even it meant a smaller pay off in the end.

Sunk costs effect.
Discontinuing the project would almost certainly have high financial costs for the developer, such as past expenditures and canceling contracts. The amount of investment “sunk” into the project would have motivated the developer to continue investing further even if those investment resources would have been more productive elsewhere.

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