Gerald invested $25,000 in a new business venture. Within 6 months, it appeared that the venture was failing. To stay afloat, he invested another $25,000 in the hopes of saving his initial $25,000 investment. At the one-year anniversary of the business, his friend questioned his judgment in investing in this business and presented projections from industry experts who suggested the venture was not viable and he should cut his losses. Gerald wanted to prove he had good business instincts and invested an additional $15,000. What type of decision-making distortion is Gerald experiencing?

Question

Paxton Small

Business

19 August, 12:56

Gerald invested $25,000 in a new business venture. Within 6 months, it appeared that the venture was failing. To stay afloat, he invested another $25,000 in the hopes of saving his initial $25,000 investment. At the one-year anniversary of the business, his friend questioned his judgment in investing in this business and presented projections from industry experts who suggested the venture was not viable and he should cut his losses. Gerald wanted to prove he had good business instincts and invested an additional $15,000. What type of decision-making distortion is Gerald experiencing?

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Pirate · Answer 1

Escalation of commitment

Explanation:

Escalation of commitment refers to an act of pumping in more money, time and other resources in a bad investment project which is going to accrue to no gains.

In the given case, the investor is aware of the business investment being unfruitful. Yet to conform to perceptions, judgement and impression one casts on individuals around, he continues investing more and more.

Here, the investor is trying to prove validity of his business decisions and at the same time conform to views and judgement of his friends and people. Thirdly to guard and protect the reputation of being rational and consistent in decision making. This is termed as escalation of commitment.