A bias that multiplies dollars but also turns gold into lead!

A magic wand that lets you sell three dollars’ worth of value for the price of one?

The escalation of commitment bias is defined as the tendency to keep putting effort (financial resources, time, energy, managerial attention…) into initiatives that are not working, primarily to avoid losing the investment already made. In everyday life, this can be illustrated by decisions made to avoid the feeling of having wasted time: continuing to wait for a bus whose arrival is uncertain, standing around hoping a ski lift will eventually reopen, or during a school exam, stubbornly trying to solve an exercise rather than starting over by moving on to the next one!

The first major academic study on this bias¹ (in 1976) placed students from a university in Illinois in the role of financial managers of a fictional company (Adams & Smith Company). The students were first asked to invest 10 million dollars either in the consumer products division or in the industrial products division. In a second phase, after the researchers artificially manipulated five years of sales and earnings data to create the illusion of either success or failure, the students were asked to decide how to allocate an additional 20 million dollars between the division initially chosen and its alternative.

The students chose to allocate 42% more to the division they initially selected when past performance was negative (13.1 million dollars versus 9.2 million dollars when performance was positive)! When the initial investment decision was presented as having been made by someone else, the gap shrank to only 12%, still in favor of the division portrayed as having been less successful. Thus, the money invested becomes a real lead weight… and therefore a burden on financial reasoning!

This escalation of commitment bias takes on a particularly strong resonance in situations that require decisions involving third parties, especially in negotiations or auction settings. This is precisely what the well‑known one‑dollar auction² experiment illustrates: a one‑dollar bill is put up for auction (with no maximum bid limit) and is awarded to the highest bidder—the last person to raise their offer. With bids increasing in increments of five cents, players typically end up exceeding the rational break-even threshold of one dollar. Indeed, it often seems preferable to bid above that threshold (for example, up to two dollars) in the hope of reducing one's loss by recovering part of the amount wagered thanks to winning the dollar bill! The researcher frequently observed final bids ranging from $1.50 to $3, with even higher numbers recorded by J.K. Murnighan when the auction involved $20 bills !³ This is, without a doubt, an example as extreme as it is illuminating of the escalation of commitment.

How can we manage our investments effectively despite this bias?

The escalation of commitment bias is frequently reflected in corporate decision‑making, especially in the context of major projects where it becomes difficult to turn back after allocating significant human and financial resources. This is the trap created by what we call “sunk costs”—costs that cannot be recovered. These costs encourage the continuation of a project in order not to “lose” the amounts already invested, a situation familiar to many entrepreneurs, particularly those who have faced the choice between taking on additional debt to rescue a project or, conversely, capitulating.

But this cognitive bias is also very present in wealth management. Even when an investment turns out poorly, it is common to leave things unchanged (status quo bias) or even consider reinvesting in the same solution. Of course, making additional investments after a market downturn can be relevant. However, one must ensure that the decision to persist on the same path is not driven by a desire for self‑justification of the previous choice. Stubbornness—or worse, increasing the amount of a poorly performing initial investment—should never be motivated by the need to “prove” the coherence of the original decision.

To counter this bias, it may be wise to set clear limits on the size of potential losses or on one’s exposure to a specific category of assets. It can also be useful to regularly reassess one’s financial (and wealth) decisions as if they were being made for the first time, without taking past choices into account!

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Not much glory in having read all the way to the end if you only did so out of a sense of commitment!

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