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Past investments are irrelevant to decisions about the future. The correct response is to invest in whatever option promises the highest return on investment. In practice, decision-makers may do nothing of the sort preferring to hang on to their investments in the hope of recovery even at the risk of compounding their losses. Persistence in the face of a stream of losses is known as escalation. This chapter outlines the main theories suggested by researchers to explain what causes escalation. It describes possible social-psychological explanations of escalation and looks at an alternative school of thought known as decision dilemma theory. It discusses prospect theory and the psychology of irrational risk preferences, responsibility theory, the vulnerability of groups to escalation, how decision-makers can be manipulated into risk-taking, how success can lead to disaster, and whether persistence is an irrational behaviour. The book looks at the case of Project Taurus, commissioned by the London Stock Exchange but cancelled four years later whilst it was still being built.
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