Escalation of commitment bias

Escalation of Commitment Bias: The Trap of Stubborn Convictions

Feb 5, 2025

As intelligent individuals, why do we double down on failing ventures, clinging to sinking ships even as the water rises? The answer lies in the insidious grip of escalation of commitment bias—a psychological phenomenon that compels us to persist with bad decisions, often to our detriment. This bias, as timeless as human ambition itself, has pervaded every corner of life, from relationships and career paths to, most notably, the high-stakes investing world. Understanding this bias is not merely an intellectual exercise but a practical imperative for anyone seeking to navigate the treacherous waters of financial markets with clarity and confidence.

The Allure of Persistence: A Double-Edged Sword

At its core, the escalation of commitment bias stems from a noble instinct: persistence. In many contexts, perseverance in the face of adversity is a celebrated virtue. History is replete with tales of visionaries who defied the odds, sticking to their convictions even when the world doubted them. Yet, this same instinct can morph into a dangerous vice in investing. Gripped by the fear of loss and the desire to prove their initial judgement correct, investors often pour additional resources into failing investments, refusing to cut their losses. They become prisoners of their own sunk costs—the time, money, and effort already expended that can never be recovered.

Consider the investor who clings to a collapsing stock, convinced that their patience will eventually be rewarded. Or the fund manager who refuses to abandon a strategy that no longer works, fearing that doing so would tarnish their reputation. These behaviours are not anomalies but the natural result of escalating commitment bias. While they may feel rational at the moment, they often lead to disastrous outcomes, as resources are squandered on ventures that should have been abandoned long ago.

The Psychology of Escalation: Why We Fall Into the Trap

The roots of escalation of commitment bias lie deep within the human psyche. One powerful driver is the principle of cognitive dissonance—the discomfort we feel when our actions conflict with our beliefs. When an investment begins to fail, it challenges the investor’s initial judgement, creating psychological tension. To resolve this tension, many double down, convincing themselves that the investment is still sound and that success is just around the corner. This rationalisation allows them to maintain their self-image as competent decision-makers, even as evidence mounts against them.

Another factor is the illusion of control—the belief that we can influence outcomes that are, in reality, beyond our grasp. Investors often overestimate their ability to predict market movements, leading them to persist with losing investments, hoping their skill will eventually turn the tide. The occasional success stories of those who ‘stuck it out’ and were vindicated reinforce this illusion, creating a dangerous narrative that persistence always pays off.

Finally, there is the fear of regret. The prospect of selling a losing investment and watching it recover afterwards is so painful that many choose to hold on, even when it is against their best interests. This fear is compounded by the social stigma of admitting failure, which can be particularly acute for professional investors whose reputations are on the line.

Breaking Free: Strategies to Overcome Escalation of Commitment Bias

While escalation of commitment bias is deeply ingrained, it is not insurmountable. The first step is to recognise its presence. Awareness of the bias allows investors to question their decisions more critically and to distinguish between justified persistence and irrational stubbornness. One effective practice is to set predefined exit points for investments based on objective criteria rather than emotional reactions. These can include stop-loss orders or target prices, which remove the temptation to hold on indefinitely.

Another powerful tool is the contrarian mindset. Investors can gain a more balanced view of their decisions by deliberately seeking out perspectives that challenge their assumptions. This is particularly important in the echo chambers of modern finance, where groupthink often reinforces the escalation of commitment. Consulting independent analysts or considering worst-case scenarios can provide a valuable reality check.

Investors should also strive to separate their egos from their investments. This requires humility—a willingness to admit mistakes and to learn from them. The most successful investors are not those who never make errors but those who recognise them quickly and adapt accordingly. As Warren Buffett famously said, “The most important thing to do if you find yourself in a hole is to stop digging.”

Timeless Lessons from Philosophy and Modern Investing

The wisdom of ancient philosophers offers valuable insights into overcoming the escalation of commitment bias. The Stoics, for instance, taught the importance of focusing on what is within our control and letting go of what is not. This perspective can help investors avoid the illusion of control and accept that some losses are inevitable. Similarly, the concept of opportunity cost, first articulated by 18th-century economist Adam Smith, reminds us that resources tied up in failing ventures could be better deployed elsewhere. Investing means recognising when to cut losses and reinvest in more promising opportunities.

Modern investing strategies also provide practical tools for managing the escalation of commitment. Diversification, for example, reduces the emotional attachment to any single investment, making it easier to exit when necessary. Dollar-cost averaging allows investors to commit to a disciplined, long-term approach, reducing the temptation to overreact to short-term setbacks. And using data-driven decision-making, such as technical analysis or quantitative models, can help investors remain objective and minimise the influence of emotions.

The Path Forward: Turning Awareness into Action

Escalation of commitment bias is a formidable adversary, but it is not invincible. By combining timeless philosophical principles with modern investing techniques, investors can develop the clarity and resilience needed to navigate the complexities of financial markets. The key is to remain vigilant—t,uestion our assumptions, tocognise when persistence becomes counterproductive, and tot decisively when the situation demands it.

Ultimately, overcoming the escalation of commitment bias is not just about avoiding losses; it is about cultivating the mindset of a successful investor. This means embracing uncertainty, learning from mistakes, and continuously refining one’s approach. It is a journey of self-mastery as much as it is a pursuit of financial gain. And for those willing to undertake it, tangible and intangible rewards are well worth the effort.

So the next time you find yourself tempted to double down on a failing investment, pause and reflect. Are you driven by rational analysis or by the whispers of escalation of commitment? The answer could make all the difference.

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Escalation of Commitment Bias: The Trap of Stubborn Convictions Feb 5, 2025 As intelligent individuals, why do we double down ...