Irrational escalation

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Irrational escalation (sometimes referred to as Irrational escalation of commitment) is a term frequently used in psychology, philosophy, economics, and game theory to refer to a situation in which people can make irrational decisions based upon rational decisions in the past or to justify actions already taken. Examples are frequently seen when parties engage in a bidding war; the bidders can end up paying much more than the object is worth to justify the initial expenses associated with bidding (such as research), as well as as part of a competitive instinct.

Examples

• After a heated and aggressive bidding war Robert Campeau ended up buying Bloomingdale's department store for an estimated 600 million dollars more than it was worth. The Wall Street Journal noted that "we're not dealing in price anymore but egos". Campeau was forced to declare bankruptcy soon afterwards.^{[#endnote_Bazerman]}
• Often times when two competing brands are attempting to increase market share, they end up spending money without either increasing market share in a significant manner. Though the most commonly cited exmples of this are Maxwell House and Folgers in the early 1990s, this has also been seen between Coke and Pepsi, and Kodak and Polaroid.
• The dollar auction is a thought exercise demonstrating the concept.

Sources

↑  Max H. Bazerman: Negotiating Rationally January 1, 1994 (ISBN 0029019869).

[ v]·[ d]·[ e]	Topics in game theory
Definitions	Normal form game · Extensive form game · Cooperative game · Information set · Preference
Equilibrium concepts	Nash equilibrium · Subgame perfection · Bayes-Nash · Trembling hand · Correlated equilibrium · Sequential equilibrium · Quasi-perfect equilibrium · Evolutionarily stable strategy
Strategies	Dominant strategies · Mixed strategy · Grim trigger · Tit for Tat
Classes of games	Symmetric game · Perfect information · Dynamic game · Repeated game · Signaling game · Cheap talk · Zero-sum game · Mechanism design
Games	Prisoner's dilemma · Chicken · Stag hunt · Ultimatum game · Coordination game · Matching pennies · Minority game · Rock, Paper, Scissors · Pirate game · Dictator game
Theorems	Minimax theorem · Purification theorems · Folk theorem · Revelation principle · Bishop-Cannings theorem
Related topics	Mathematics · Economics · Behavioral economics · Evolutionary biology · Evolutionary game theory · Population genetics · Behavioral ecology · Adaptive dynamics · List of game theorists

 

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