Escalation of Commitment and Its Effect on Capital Budgeting: A Review of the Literature‪.‬

INTRODUCTION It is commonly accepted among capital investors that "projects be selected, continued or terminated based on their net present values (NPV)" (Statman and Caldwell, 1987). Investment decisions are typically future focused. In other words, decision makers exhibit prospective rationality. Often, however, when a financial setback occurs individuals become focused on past events; they exhibit retrospective rationality. They attempt to recoup losses or sunk costs by allocating additional funds to a failing project when NPV rules suggest withdrawal from the project (Conlon and Leatherwood, 1989). This increased commitment of resources to projects performing below expectations is termed escalation (Staw, 1976).