Escalation of commitment is the tendency for managers to irrationally stick with an investment, even one that is broken down into a sequential series of decisions, when investment criteria are not being met.

Question

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Both real options and decisions involving escalation of commitment require specific environments with sequential decisions. As the escalation-of-commitment literature indicates, simply separating a decision into multiple parts does not guarantee that decisions made will turn out well. This condition is potentially present whenever the exercise decision retains some uncertainty, which most still do. The decision to abandon also has strong psychological factors associated with it that affect the ability of managers to make correct exercise decisions.

Escalation of Commitment Is the Tendency for Managers to Irrationally