The Escalation Problem: Why Organizations Cannot Stop Doing What Is Not Working

In January 2021, as the full scope of the GameStop short squeeze became public, most commentary focused on the mechanics of the trade and the behavior of retail investors. Less attention was paid to the behavior of the institutional investors who had maintained their short positions as losses mounted, adding to positions that the market was clearly and repeatedly signaling were wrong. The episode was striking not because institutional investors made an error — errors are inevitable — but because of how long they persisted in it, and how systematically they constructed justifications for that persistence in the face of contradicting evidence.

This was not irrational behavior in the colloquial sense. It was a nearly textbook demonstration of escalation of commitment, one of the most reliably documented phenomena in organizational and behavioral economics research. The psychological cost of admitting that a position was wrong exceeded, for a period of time, the financial cost of maintaining it. Organizations do not cut losses when cutting losses requires admitting that the original decision was an error. They average down. They double up. They develop increasingly elaborate rationales for why the market is wrong and they are right.

The original research on escalation of commitment, conducted by Barry Staw in the 1970s and subsequently extended by dozens of researchers across organizational, psychological, and economic contexts, established the phenomenon with unusual robustness. The finding is consistent across cultures, industries, and organizational types: decision-makers invest more resources into failing courses of action after receiving negative feedback than they would have invested had they been making the initial decision fresh. The prior investment, which is by definition irrecoverable, becomes a psychological anchor that distorts the evaluation of future prospects.

What makes escalation of commitment so resistant to organizational correction is that it is experienced from the inside as diligence rather than denial. The manager who continues funding a failing project is not experiencing herself as avoiding accountability. She is experiencing herself as committed, as thorough, as unwilling to abandon something prematurely. The psychological phenomenology of escalation is indistinguishable, to the person experiencing it, from the phenomenology of justified persistence. This is precisely what makes it so difficult to address through awareness or training. Telling people about escalation of commitment does not reliably prevent them from escalating. They simply experience their escalation as the justified exception.

This cognitive pattern is amplified at the organizational level by several structural features that individual-level research does not fully capture. First, organizations create social accountability around initial decisions. When a project has been publicly championed by a senior leader, the cost of abandoning it includes not only the admission of analytical error but the public acknowledgment of having been wrong, with all the status and credibility implications that entails. The social cost of reversal often exceeds the financial cost of continuation. Second, organizational incentive structures typically penalize the visible act of cutting losses more severely than the invisible act of continuing to absorb them. A manager who kills a project is responsible for the write-off. A manager who continues a failing project can distribute responsibility across time and circumstance. The incentive structure rationally favors continuation.

This is why organizational rules designed to prevent escalation, such as pre-set loss limits, stage-gate reviews, or automatic kill criteria, are so routinely circumvented when the time comes to apply them. The people responsible for enforcing them are experiencing exactly the same cognitive and social pressures that escalation theory predicts. The rule feels wrong precisely because escalation feels right. And because the rule-enforcers are typically the same people who made the original decision, they have every psychological and social incentive to find reasons why this particular situation does not meet the criteria for termination.

The organizational evidence on this point is extensive. Post-mortems on failed large-scale projects, from infrastructure overruns to technology implementations to military engagements, consistently identify the same pattern: escalating investment in the face of accumulating negative signals, accompanied by increasingly sophisticated rationales for continuation, until the cost of continuation finally exceeds even the psychological cost of reversal. By that point, the damage is substantially greater than it would have been had the termination occurred when the negative signals first became clear.

The structural solution is not better judgment, and it is not awareness training. It is the architectural separation of decision-making authority. Specifically, it requires separating the people who make initial resource allocation decisions from the people who evaluate those decisions over time, combined with pre-commitment mechanisms established before the original decision creates the psychological investment that escalation exploits. Independent review panels, mandatory external evaluation at defined intervals, and kill criteria established at project inception rather than at the point of failure — these are the structural interventions that the research supports.

Organizations that have built these features into their governance structures report meaningfully lower rates of escalatory investment. Those that rely on the judgment and integrity of the original decision-makers to self-correct are, in most cases, relying on precisely the cognitive apparatus that escalation theory identifies as the source of the problem. The solution cannot reside in the same place as the failure.