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Ok Tedi. Image via Wikipedia

I continue to learn about human flaws that contribute to poor corporate decision-making. Here’s another: Escalation of commitment. That is the tendency, having made a decision, to stick with it in the face of mounting evidence that it was a bad call.

There is nothing new about this, it is even described in Macbeth:

I am in blood
Stepp’d in so far, that, should I wade no more,
Returning were as tedious as go o’er. (Act III, Scene 4)

The textbook example is the Vietnam War, which the United States military knew for a long time it would not win.

Escalation of Commitment was first identified in a business context in 1976 by Barry Staw.

We might be more familiar with the term ‘sunk cost fallacy‘. This is when wasteful expenditure has, over time, become factored into a budget and is simply accepted as an operating cost. However, if it were presented as a new initiative, it would not stand up to scrutiny.

So what happens when a company establishes or invests in a foreign venture and it subsequently emerges that there is some serious ethical problem?

  • Consider the Ok Tedi gold and copper mine in Papua New Guinea, formerly majority owned by BHP. In 1984 an earthquake ruined the retaining wall that was intended to restrain its heavy metal tailings from contaminating the water source downstream. The company and Papuan government decided it was not worth rebuilding it and significant harm was done to the environment and the health of some thousands of Papuans. Fifteen years later – compelled by a public relations and legal campaign – BHP decided the cost of persisting was too high. One has to wonder: Didn’t somebody in either BHP or the Papuan Government see this coming? Why would you leave yourself exposed to such a monumental risk? Escalation of commitment is the answer. Having invested millions in the venture, there was no way they were going to admit failure, turn around and leave. The government had a further reason for inaction: the mine accounted for over a quarter of the country’s export earnings. If only someone had spoken up about the havoc that was going on, or even commissioned a risk analysis, it might not have unfolded so badly.

Escalation of Commitment remains alive and well today. Examples abound: It is partly why

All of them do so in the face of reported abuses of the rights of the workers involved. Disappointing but that’s human nature. Sometimes you find companies that are highly sensitive to their image and immediately act when there is a scandal (Zara in Brazil being a case in point). Other times they can be embarassed into action. Other times, however, the spin doctors are too good and nothing much will happen unless the local workers organise themselves effectively.

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