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9 Cards in this Set

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Competitive Escalation Paradigm

Dollar Auction
Rational - Not bid at all

Sunk Cost
Bid goes over a dollar, in order to avoid larger loss, b/c 2nd highest bidder also pays.
Sunk Costs
The time and money already invested in something.

As sunk cost increases, our level of commitment increases.

This commitment may not be rational.

From the economic perspective.
Ignore what's already invested and only consider future gains and losses.
Escalation
More likely to escalate when the cause is unrelated to the initial decision.
Escalation in Groups
Groups are less likely to escalate commitment, but if they do so, it is to a greater extent.
Outside reason is used as rationale for escalation
Responsibility is divided amongst the group.
Groupthink can cause escalation.
Competitive Escalation
Companies A & B are competing to acquire company C.
Outcomes:
- Winner = + 1.2 billion
- Loser = - .5 billion

How much should you offer for company C?
At 1.7 billion both bidders lose .5 billion.
Above 1.7 billion, the bidding becomes very irrational.
Perceptual Biases
A cause of escalation.

You notice information that supports your initial decision and ignore information that goes against it.

Downplay the negative.
Upplay the positive.
Both can be done unintentionally.
Judgment Biases
A cause of escalation.

Any loss will distort our judgment toward continuing because according to Prospect Theory we are more willing to take risks when facing a sure loss.
Impression Management
A cause of escalation.

We don't like others to know we have made a mistake and we want to appear consistent.

Since managers are reward based on results they are motivated to hide or delay bad outcomes by escalating.

Continue to invest in order to put off the inevitable discovery of a mistake.
Competitive Irrationality
The two parties engage in an activity that is clearly irrational in terms of the expected outcomes to both sides.