BY ENTREPRENEURS: RATIONAL DECISION-MAKING OR ESCALATION OF

Abstract

Among the mast important decisions made by entrepreneurs are those relating to whether to expand, contain, or contract their businesses. We would expect these major commitments to be based upon expectations about future performance; these ex~e~tatiorls, in turn, would be heavily injiuenced by performance to date. Thus, we might presume that businesses that have been receiving favorable feedback from the marketplace would and those receiving negative feedback would be more likely to contract. Ongoing research in decision-making suggests that psychological processes may play a role in influencing these decisions. Under certain conditions entrepreneurs may be influenced by a phenomenon termed “escalation of commitment.” This may lead entrepreneurs to decide to expand the asset bases of their firm::, regardless of feedback from the marketplace. The literature on escalation of commitment suggests that, under certain conditions, decisionmakers who make an initial decision become overly committed to the original choice and then subsequently rmtke decisions biased by psychological commitment. Previous research (most of which has been conducted in iaborato~ settings) suggests that escalation bias is more likely to occur (I) if entrepreneul~s have started the~r~rms (rather than purchased them); (2) i~entre~reneurs have partners~ (3) if entre~~reneurs expect to use their skills in the new business; and (4) if entrepreneurs are over~on~d~~lt (that is, expected to do substantially better than oehers in the same kinds of business), It is also expected that these “escalation predictors” will have a relatively greater influence when feedback is .negative than when it is positive; the negative feedback seems to invoke a selj-just@cation process. It 1s also hypothesized that the injluence of these predictors will be less in the third year of a business than in the second year. Finally, it is expected that these psychological influences will help

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