The best time to review a business project, like the development of a new product, is when it’s 50 percent complete.
That is one of the important findings of new research co-authored by Vikas Mittal, the J. Hugh Liedtke Professor of Management-Marketing at Rice University’s Jesse H. Jones Graduate School of Management. Mittal points to the tendency of companies to escalate their commitment to projects (i.e., spend money) when they are nearing completion, even when it’s clear that the work is a bust. Implementing a procedure that requires a thorough review of projects when they’re half done can be an effective way to prevent such commitment to failing courses of action, especially when the projects carry significant risk.
Have you ever stood in line waiting to buy tickets for your favorite band or sports team and heard someone at the ticket counter scream that the event was sold out? What did you do? If you continued waiting in line, despite the fact you knew you weren’t getting a ticket, then you have some experience with a phenomenon known as the escalation of commitment. So, too, if you bought a stock and held it even after the value plummeted.
Although pervasive in everyday life, the escalation of commitment phenomenon is equally if not more apparent in the business world. “In businesses, you often come across the situation where you’ve invested a lot of resources into a particular project or a particular idea and then you realize it may not be the best project anymore,” said Vikas Mittal, J. Hugh Liedtke Professor of Management-Marketing at Rice University’s Jones School of Management. “The rational thing to do once you figure this out is to stop throwing so-called good money after bad.”
Of course, people often don’t do the rational thing, either in everyday situations or in business, which Mittal points out in a new research paper, “The Effect of Decision Risk and Project Stage on Escalation of Commitment,” which he cowrote with Xin He of the University of Central Florida. For businesses, the potential costs of acting irrationally can be staggering. “People do tend to throw good money after bad money,” Mittal said. “People get committed to a project, and they keep investing in it even when it becomes very clear that they shouldn’t.”
Why? In his research, Mittal examines not only how the risk level of a project and its stage of development — in other words, how far the project has progressed — influence whether people are willing to devote more resources to an endeavor, but also how awareness of those factors can help executives make better decisions. This is a new area of research. “In the past, people have looked only at whether there was an escalation of commitment, but they never paid attention to the time horizon and the risk of the project,” Mittal said.
What Mittal found is that in the early and late stages of a project, there is a tendency to escalate commitment. Early on, right after a project is begun, the desire for information tends to encourage managers to continue with the project and invest more resources. A different dynamic, the need for closure, kicks in when a project is nearing completion, even if it’s clearly a failure. “If a project is 90 percent complete, the bias people have is that they just want to see something through to completion,” Mittal said. “In the final stages, people end up escalating their commitment.”
The amount of risk involved with a project also impacts whether executives are likely to spend more on its development. When the perception of risk is high, there’s less chance that management will escalate their commitment. When a project seems relatively risk-free, however, the cash keeps coming. “If they think it’s not risky, they actually think that they have a lot more control of the situation, and they keep spending when they should not,” Mittal said.
Perhaps the most important and most tangible finding Mittal provides is that the tendency to escalate commitment is most sensitive to feedback when a project is about 50 percent complete. This, the research shows, happens because the need for information and attaining closure is relatively low compared with 10 percent or 90 percent completion. This is an important insight because if management can learn to review projects, particularly risky ones, when the work is half done, they may be able to stop wasteful spending. “If you are in the very early stages of a project or in the very late stages of a project, people keep spending money, and they don’t care if it’s a good or a bad project,” he said. “But when they are in the 50 percent range, if they find out it’s a bad project and you convince them it’s a risky thing to do, they pull back.”
The trick is to decide up front to take a close look at a project when it’s half finished. “The tool that management should use is to get a commitment from everyone that when the project is about half complete, we are going to have a review and decide if we want to continue,” Mittal said. “Investors, for instance, who have a defined time horizon may want to commit to reviewing their portfolio during the intermediate stages.”
For more information, contact Vikas Mittal at email@example.com or Laura Hubbard of the Jesse H. Jones Graduate School of Management at firstname.lastname@example.org.