Business System Analysis amp; Decision Making- Lecture 7.ppt

Business System Analysis Decision Making- Lecture 7 Zhangxi Lin ISQS 5340 July 2006 Chapter 5: The Nonrational Escalation of Commitment The Unilateral Escalation Paradigm The Competitive Escalation Paradigm Why Does Escalation Occur? Integration Situations You bought a mutual fund two years ago. Your financial advisor told you that this is a safe mutual fund with good potentials. In last year it grew 2% and this year it remains almost the same level even other alternative choices of mutual funds have grown more than 10% in the last year. Are you going to keep it because it may be time for this fund to grow, or you are to sell it? You have been sitting in front of a slot machine for an hour and you have plus in two $20 bills, and now the balance is less than $2. This was a good machine as you played last time. You know slot machines are sometimes making gamblers happy though most time do not. Now it could be the hunch time or it will continue to devour another $40. Are you going to change a new machine? The Unilateral Escalation Paradigm The mechanism underlying escalation is self-justification. Groups are less likely than individuals to escalate commitment.. However, it a group does, it tends to do so to a greater degree. It is difficult to separate initial decision from related future decisions. Our decisions tend to be biased by our past actions. There is a natural tendency to escalate commitment, particularly after receiving negative feedback. The Competitive Escalation Paradigm – Company Acquisition The case of company acquiring Company C worth of $1.2billion to A or B If A acquires C, B will lose $0.5 billion, and vise versa. If A and B compete, both will lose $0.5 billion The Competitive Escalation Paradigm The difference between the cases of competition escalation and unilateral escalation Using a game theoretic model we can study the final outcome with certainty for the competition escalation case. We fall under the escalation because of bounded rat