The advancement of a project tends to require a project owner (i.e., “the principal”) and a project manager. Engaging in long-term investment, the manager often faces the dilemma of how to allocate resources. The schedule of long-term investment projects are generally divided into several stages. After an organization undertakes a feasibility study, it begins to devote resources to the project. Since the feasibility evaluation of the project is based on predicted data, it is only after the project is initiated and resources have been injected that the manager can acquire real information from the project. Sometimes, the manager may realize, unexpectedly, that due to excessively optimistic predictions or major changes in external environment, the long-term investment project can no longer proceed as planned, and that the best choice for the corporation’s overall interests is to terminate the project immediately.
Therefore, escalation of commitment is an individual's persistent behavior at sustaining commitment to an original decision or course of action (Babatunde, 2016).
However, in the real world, when negative feedback has occurred because of the manager’s poor decision, it is often difficult to let expended resources go. The manager will ask more resoures “throws good money after bad” in the hope that new input will make up for previous errors and produce positive outcomes in the future.
The manager becomes unwilling to accept previous errors and negative feedback on the original project, attempts to avoid bearing responsibility, and takes risks in convincing the principal to continue to devote new resources to cover up previous mistakes. This behavior of the project manager is known as “commitment escalation”.
Commitment escalation is a common phenomenon in real life. For instance, an addicted gambler attempts to reclaim previous losses leading to gambling ultimately.
Also, an investor may keep buying more securities to recoup past losses caused by incorrect evaluating the trend of stock market, but only end up poorer. There was also the case of Nick Leeson,1 a trader at Barings Bank Singapore Branch, who traded in Nikkei options for private benefits, but the index plummeted, contrary to his personal judgment and predictions. Unwilling to accept earlier investment losses and in attempt
1 Source: BBC NEWS, Business: The Economy How Leeson broke the bank http://news.bbc.co.uk/2/hi/business/375259.stm (2016.06.23)
to cover his personal liability for his incurred losses, he used his authority to avoid internal investigation, and appropriated bank capital to keep buying futures in attempt to drive up their value and make up for previous losses that resulted from his embezzlement of bank capital. Ultimately, he suffered major losses, causing the bank’s bankruptcy and below-price liquidation of bank assets, resulting in the collapse of Barings Bank, and shocking international financial markets. These were all classic cases of commitment escalation.
Commitment escalation does not only occur in personal actions, but also in project execution. For instance, Taiwan’s High Speed Rail and Hsuehshan Tunnel began with many promises from the project manager, but when negative feedback appeared during project construction, the manager was unwilling to accept previous errors and continued to inject large quantities of resources. Even though, ultimately, the projects were completed and became operational, construction was delayed and the budget was exceeded several times over, causing the public to doubt construction project control mechanisms as well as executive efficiency and quality. This researcher’s interest in “how to govern commitment escalation in project manager”
was therefore piqued.
1.2 Research Motivation and Purpose
Domestic and foreign research on organizational and personal commitment escalation has greatly contributed to our understanding of the phenomenon of commitment escalation. However, there has been no comprehensive interpretation of how to govern manager in civic organizations to prevent commitment escalation. This is the first research motivation for this study. When civic organizations execute projects, if commitment escalation occurs in the manager, it would certainly cause major damage to the organization and the principal. The severity of this problem is deserving of attention, and this is the second research motivation for this study.
Moreover, although on the whole commitment escalation has yielded a small number of successes, the vast majority of commitment escalation in projects produces problems and causes major setbacks to projects, in turn resulting in immeasurable losses to the principal in terms of organizational trust and financial resources. Even though commitment escalation is undesirable to the organization and the principal, supervisory mechanisms in the project execution process tend to be ineffective in
preventing commitment escalation. If the principal is unable to find an effective method to eliminate supervisory loopholes in a timely manner, the manager may opportunistically engage in commitment escalation. This is the third research motivation for this study.
On this basis, the main purpose of this study is: assuming that commitment escalation is inevitable in the project manager when executing a project, how should the principal establish appropriate supervisory and governance mechanisms to prevent commitment escalation, or establish a system of punishments and rewards so that the project manager can assess and discover that honesty is the better option; dishonesty has no benefits, would ruin one’s reputation, and incur stringent punishment from the organization, which would deter the manager from inappropriate behaviors. Therefore, the study modified the commitment escalation cycle model of Staw and Ross (1987) to establish effective supervisory mechanisms in the various stages of project execution (divided by time into ex-ante, interim, and ex-post) in order to prevent commitment escalation by the manager. This provides a reference for future research on civic organizations’ governance of commitment escalation by project manager.
This study referred to the commitment escalation cycle model proposed by Staw (1976) to create the basic research model to find ways to describe and interpret commitment escalation, and to broaden the basic model for extended analysis via computations and basic model analysis.
1.3 Research Contributions
In real life, commitment escalation is a common phenomenon. Attention has also been paid to the governance of commitment escalation in the past. Staw and Ross (1987) attempted to explain the cause of commitment escalation, and further proposed methods to discourage commitment escalation. However, Staw and Ross (1987) only briefly described solutions to govern commitment escalation without explaining the causal relationships of governance and their natures. Therefore, the present study modified and extended the commitment escalation cycle model of Staw and Ross (1987) to analyze and propose the mechanisms by which a principal may govern possible commitment escalation in a manager in the course of project execution.
The present study discovered that in project planning and execution, if the principal is unwilling and/or unable to evaluate the project proposal, regardless of
whether the manager was excessively optimistic or pessimistic in describing the environment conditions in the proposal, or hoped that environment conditions would improve in the second phase, it would elicit commitment escalation by the manager as a consequence.
If the principal can increase their accuracy in assessment of actual environment conditions and strengthen their control over projects, then the principal can effectively stop possible commitment escalation from taking place when the manager executes projects.
1.4 Research Structure
The remaining of this paper is organized as follows: In chapter 2, past literature concerning about the issues of commitment escalation, project, and asymmetric information are reviewed respectively. In chapter 3, we firstly create the framework of the model. Then discuss the cases of principal do not carry out project assessment and principal carries out project assessmentregimes. Chapter 4 is the conclusion.