Factors influencing the decision-making of third party consultants in the context of evaluating escalation of commitment

Abstract

Successful management of capital investment projects is vital to organisational performance. However, research shows that managers are prone to continue investment in projects in the face of significant negative accounting feedback – this is known as the ‘escalation of commitment’ phenomenon. Escalation behaviour is undesirable as it diverts resources from more economically valuable investments and can lead to sub-optimal project outcomes. This thesis reports two experiments that investigate how four factors can help reduce escalation of commitment to unprofitable capital investment projects. Study One examines how the type of consultant (internal versus external) and the nature of their assigned purpose influences their willingness to communicate project concerns to the senior management of an organisation. Results from this first Study show that even though consultants may recognise problems with a project, communication of these to senior management is not necessarily automatic. Specifically, Study One shows that external consultants are generally more willing than internal consultants to communicate concerns to senior management. Furthermore, an interaction is found between the internal consultants and their assigned purpose, where internal consultants assigned a purpose that specifically requires communication of concerns are less willing to communicate than internal consultants who are not specifically assigned do so. Study Two examines how different moods (positive versus negative) interact with information presentation sequence (numerical information presented last versus narrative information presented last) to influence an external consultant’s recommendation to continue an unprofitable project. Results from Study Two show that consultants in a positive mood spend significantly less time processing available project information during project evaluation than those in a negative mood. Furthermore, consultants in a positive mood show greater variability in their recommendation depending on differences in information presentation sequence. Specifically, results show that consultants in a positive mood are more likely to recommend an escalation of commitment where narrative information is presented last than where numerical information is presented last. In contrast, consultants in a negative mood show greater consistency in their recommendations, and are not affected by differences in information presentation.