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.

Comments

Post a Comment

Popular posts from this blog

Two college graduates recently joined the same major newspaper as journalists. Both work long hours and have tight deadlines for completing their stories. They are under constant pressure to scout out new leads and be the first to report new controversies. One journalist is increasingly fatigued and despondent and has taken several days of sick leave. The other is getting the work done and seems to enjoy the challenges. Use your knowledge of stress to explain why these two journalists are reacting differently to their jobs.

This incident describes two journalists with similar stressors experiencing different levels of stress and stress consequences. This illustrates the distinction between stressors and stress. It may also highlight the importance of individual differences in stress. One possible reason why these two journalists are experiencing different stress levels is that they might perceive the situation differently. The low stress journalist might have higher self-esteem and confidence that he/she can complete the work. A second explanation might be that the journalists have different threshold levels of resistance to a stressor . Both are recent graduates and we don’t know if they are a similar age. However, the high stress journalist might have less resistance because he/she has recently experienced other stressors , such as death of a family member. Finally, the different stress levels might be explained by the different strategies used to manage the stress. The ...
Read more

After hearing a seminar on organizational learning, a mining company executive argues that this perspective ignores the fact that mining companies could not rely on knowledge alone to stay in business. They also need physical capital (such as digging and ore processing equipment) and land (where the minerals are located). In fact, these two may be more important than what employees carry around in their heads. Evaluate the mining executive’s comments.

This question relates to the importance of organizational learning perspective in achieving organizational effectiveness. Meanwhile, the question emphasizes the critical understanding that organizational effectiveness is a function of an overall holistic system view of the effective and efficient interplay of all three elements of software (the knowledge and processes), hardware (the structures and the people) and the harmonious relationship between the organization and its environment. Focusing on any one component at the expense of the rest would definitely result in incomplete picture of an effective organization. Some executives still view land and capital as a company’s most valuable assets . They give lip service to the idea that “People are our most value assets” but still don’t understand that land and capital have little value without people . For instance, this mining company would not have found land with ore deposits unless it had the knowledge to find those minera...
Read more

During a diversity management session, a manager suggests that stereotypes are a necessary part of working with others. “I have to make assumptions about what’s in the other person’s head, and stereotypes help me do that,” she explains. “It’s better to rely on stereotypes than to enter a working relationship with someone from another culture without any idea of what they believe in!” Discuss the merits of and problems with the manager’s statement.

This question raises the fundamental dilemma that stereotyping is both a necessary and a troublesome activity in the perceptual process. On the one hand, the manager is correct that stereotyping helps us to fill in missing information, such as the non-observable characteristics of a person that only become apparent after a long time. Also, stereotyping helps us to organize information more efficiently by placing people into predetermined categories. Although most stereotypes have some truth to them, there is also plenty of error and distortion which could lead to employment discrimination. It is unlikely that someone perfectly fits the stereotype category, so we tend to assign traits that are untrue. Stereotyping makes it difficult for people to alter their beliefs about a person regarding traits that conflict with the stereotype.
Read more