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Submission #14094
DOMINANT LOGIC, DECISION-MAKING HEURISTICS, AND ESCALATION OF
COMMITMENT IN SMALL FAMILY FIRMS
Abstract
This paper expands the escalation of commitment literature by examining the impact of
dominant logic and decision-making heuristics as antecedents of escalation. Dominant logic is an
oft-researched construct among strategic management scholars, but it has not been extensively
studied as an antecedent to escalation of commitment. Different types of dominant logic employ
cognitive simplification processes such as decision-making heuristics to focus decision-makers’
attention on different key pieces of information while disregarding others. This paper outlines a
set of propositions for how “relationships logic” and “operational logic” can lead to escalation of
commitment in small family firms due to the potential of the representativeness and availability
heuristics to screen out negative information which might otherwise be considered in decisionmaking. Investigation of these propositions has the potential to significantly impact value
creation by practitioners while extending the extant literature on escalation of commitment,
family business, strategic management, and the psychology of decision-making.
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Introduction
Whether viewed as a calculated, rational process (Buchanan & O’Connell, 2006) or as
the unintentional sum of various human behaviors (Zey, 1992), scholars agree that strategic
decision-making is a critical antecedent of firm performance (Child, 1972; Hambrick & Mason,
1984; Hutzschenreuter & Kleindienst, 2006). One way to assess the impact of strategic decisionmaking on firm performance is to examine the extent to which a given decision, based on
available information, is likely to maximize the firm’s achievement of its goals (Savage, 1954).
While this seems like a straightforward definition, it is surprising how often decision-makers
facing the same type of decision, subject to the same constraints, and privy to the same
information, come to different conclusions about what course of action is most likely to
maximize achievement of the firm’s goals. In particular, it is surprising how some decisionmakers tend to “stay the course” while others tend to change courses of action – even when they
are facing similar decisions, are subject to similar constraints, and have access to the same
information.
The tendency of decision-makers to “stay the course” and continue with a certain course
of action when there are available indications that the course of action is failing to accomplish
the organization’s goals is a phenomenon known as escalation of commitment (Staw, 1976,
1981; Staw & Ross, 1978). If performance does not improve and the firm does not alter its
course of action, escalation of commitment has been shown to lead, ultimately, to two decidedly
negative firm performance outcomes: chronic under-performance (DeTienne, Shepherd, &
Castro, 2008) and bankruptcy (Daily & Dalton, 1994).
Researchers have studied a variety of antecedents to escalation of commitment over the
years. A useful way of categorizing these antecedents was recently proposed by Sleesman,
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Conlon, McNamara, and Miles (2012), based on earlier work by Staw and Ross (1987). This
categorization scheme classifies the antecedents of escalation of commitment as (1) project
determinants, (2) structural determinants, (3) social determinants, and (4) psychological
determinants. Project determinants are “objective features of decisions that often relate to why a
course of action was begun in the first place” (Sleesman et al., 2012; 542). Structural
determinants “include organizational elements…or contextual features of organizations”
(Sleesman et al., 2012; 544). Social determinants reflect the fact that “another driver of behavior
in organizations [is] the involvement of other parties as evaluators, commentators, rivals, or
observers” (Sleesman et al., 2012; 544).
Psychological determinants “recognize that decision makers engage in cognitive and
affective processing of information that often leads them to redouble their commitment to failing
projects, rather than de-escalate” (Sleesman et al., 2012; 544), and they are arguably the most
important, empirically established antecedents to escalation. The study of the psychological
determinants of escalation to date has focused on several different core phenomena, including
self-justification (Staw, 1976), information framing biases (Schoorman, Mayer, Douglas, &
Hetrick, 1994), and the tendency of project completion to become a goal in itself (Conlon &
Garland, 1993). Other phenomena studied by researchers include decision-maker personality
(Wong, Yik, & Kwong, 2006), expertise (Bragger, Hantula, Bragger, Kirnan, & Kutcher, 2003),
and self-efficacy (Judge, Erez, & Bono, 1998).
An important potential influence on managers’ psychological biases which has not been
heavily examined by escalation of commitment scholars is the dominant logic (Prahalad &
Bettis, 1986) of a firm’s coalition of key decision-makers. Dominant logic is a culturally-shared
cognitive framework regarding “what is important” which leads a firm’s top managers to filter
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the information they consider in decision-making (Bettis & Prahalad, 1995). It is a firm-level
variable which has traditionally been studied by strategic management scholars rather than
escalation of commitment scholars, whose study of the psychological antecedents of escalation
has often focused on individual-level variables. Strategy scholars have suggested for some time
(Reger & Huff, 1993) that dominant logic is one of the principal antecedents which explain firmlevel competitive behaviors such as escalation of commitment, but to date the construct has not
been heavily examined in the escalation literature.
Over the years, strategic management scholars have studied a number of cognitive
simplification processes (Schwenk, 1988) which are often utilized in dominant logic information
filtering. One of these – framing bias (Kahneman & Tversky, 1979) – has already been studied
by decision-making process scholars (Hodgkinson, Maule, Bown, Pearman, & Glaister, 2002)
and found by escalation of commitment scholars to be a significant determinant of escalation
(Schoorman et al., 1994). Two related, but different, cognitive simplification processes which
have been less studied by escalation of commitment scholars are Tversky and Kahneman’s
(1974) decision-making heuristics of representativeness and availability. The representativeness
heuristic is a psychological mechanism which allows decision-makers to economize the amount
of information they consider in their situational assessments by focusing on the similarity of
certain pieces of situational information to the characteristics of information categories in their
individual frames of reference. Use of this heuristic could lead decision-makers to escalate
commitment if they incorrectly identify past performance as representative of performance
which has achieved their organization’s goals. The availability heuristic is a psychological
mechanism which allows decision-makers to economize the amount of information they consider
in their situational assessments by focusing on the ease with which they can recall information
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from memory. Use of this heuristic could lead decision-makers to escalate commitment if they
can easily recall from memory instances of how their prior strategic choice led to achievement of
their firm’s goals.
The study of how the representativeness and availability heuristics may impact escalation
of commitment is particularly important for scholars and practitioners alike because these
heuristics are likely employed with particular frequently in the world’s most common form of
organization: the small family business or family SME (Astrachan & Shanker, 2003; Family
Firm Institute, 2005). Given their small size, these firms tend to lack decision support systems
and resources (Feltham, Feltham, & Barnett, 2005) and rely heavily decision-making heuristics
to quickly sort through a great deal of information and arrive at a timely decision.
While smaller firms are often more dependent on decision-making heuristics than larger
firms, small family firms often follow particular types of dominant logic which can lead to
escalation of commitment if they employ the representativeness and availability heuristics in
their decision-making. Family firms are social systems which are differentiated from other types
of organizations precisely due to the influence of a particular type of dominant coalition (one
with kinship ties among dominant coalition members) on firm decision-making (Astrachan,
Klein, & Smyrnios, 2002). As such, they are often driven by “relationships logic”, in which the
priorities of key family members are what decision makers consider to be important. Given the
fact that the dominant coalition members in these firms are also often involved in managing the
business on a daily basis (Tio & Kleiner, 2005), many family firms are also often driven by
“operational logic”, in which firm operations are what decision-makers consider to be important.
As shall be examined in depth below, use of the representativeness heuristic by decision-makers
who follow relationships logic is likely to confound perception of what constitutes successful
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performance, and use of the availability heuristic by decision-makers who follow operational
logic is likely to confound perception of the likely future outcomes of continued pursuit of past
strategic choices. These decision-making biases can lead to varying levels of escalation of
commitment in family businesses depending on the degree of family ties among a firm’s owners
and the degree to which those owners are involved in the management of the firm (Lane,
Astrachan, Keyt, & McMillan, 2006).
Theoretical Background & Propositions
A basic theoretical perspective for describing decision-making in business organizations
is the strategic management model (Hambrick & Mason, 1984; Hofer & Schendel, 1978).
According to this model, decision-makers’ situational assessments influence their strategic
choices, which in turn influence firm performance. Situational assessments can incorporate a
wealth of information, including the content domain of the decision, the level of uncertainty or
risk about the decision’s likely outcomes, the firm’s available resources, indicators of the firm’s
prior performance in accomplishing its’ goals, and the likely outcomes of different potential
courses of action. Despite the breadth of information which can be considered in situational
assessments, however, information processing by boundedly rational human decision-makers
(Simon, 1957; Weick, Sutcliffe, & Obstfeld, 2005) invariably involves information filters
(Gigerenzer & Gaissmaier, 2011) which impact the breadth and thoroughness of these
assessments (Prahalad & Bettis, 1986; Rajagopalan, Rasheed, & Datta, 1993). Depending on the
situation, decision-makers consider some types of information more than other types of
information, and this filtering can lead them to select strategic choices which do not maximize
the firm’s goals.
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Escalation of commitment occurs when decision-makers make incorrect situational
assessments. The information which managers consider in their situational assessments helps
them to optimize decision utility (Schoemaker, 1982). More information about a decision gives
decision-makers more information about the prospects for success. If there are clear indications
that a prior course of action is failing, most decision-makers tend to change to a new course of
action (Bragger et al., 2003). However, if available information is ambiguous regarding the
success of a prior course of action, many decision-makers tend to focus on more on the prospects
for success than the prospects for failure (Bragger, Bragger, Hantula, & Kirnan, 1998). And if
there is information indicating that a prior course of action is yielding positive results, decisionmakers are even more likely to focus on the prospects for success and ignore the prospects for
failure (Moon & Conlon, 2002). Often, the presence or absence of information about negative
results for a prior course of action is impeded by filters on the information which decisionmakers consider in making decisions (Bateman & Zeithaml, 1989), leading to escalation of
commitment.
While there are a number of structural, organizational, and social factors which filter the
information decision-makers consider in their situational assessments, some of the most
important filters on information considered by decision-makers are the psychological
mechanisms at work inside their own minds (see Weber & Johnson, 2009, for a recent review).
Psychologists have established that decision-makers engage in two principal types of information
processing – external search and memory recall (Weber & Johnson, 2009). These two types of
information processing are impacted by two types of psychological mechanisms at work in the
head of an individual decision-maker – cognitive mechanisms and affective mechanisms.
Cognitive mechanisms are deliberative task intentions, while affective mechanisms are more
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automatic emotional responses (Kahneman, 1973). While affective mechanisms have an
important impact on situations with a high level of conflict (Elbanna, 2009) or satisfaction (Au,
Chan, Wang, & Vertinsky, 2003), and on the calculation of risk (Quartz, 2009), this paper
focuses on cognitive mechanisms due to their longitudinal impact (Weber & Johnson, 2009) on a
multi-stage decision such as whether or not to continue with a previous course of action.
Cognitive mechanisms filter the information considered in decision-making by focusing
decision-makers’ attention on particular pieces of information in their external search and
memory recall activities. Attention impacts the information decision makers perceive, both in the
initial assessment of a situation as well as in accumulation of supporting evidence for making a
choice (Weber & Johnson, 2009). It is known to influence problem identification (Starbuck and
Milliken, 1988), problem solving (Newell & Simon, 1972), resource allocation (Ansoff, 1965),
and strategic issue diagnosis (Dutton, Fahey, & Narayanan, 1983).
Some of the most important cognitive mechanisms which focus decision-makers’
attention during situational assessments are decision-making heuristics, which allow decisionmakers to simplify complex cognitive tasks by focusing on just a few key pieces of information.
Two particular heuristics which have been heavily researched by psychologists over the years are
representativeness and availability (Tversky & Kahneman, 1974). The representativeness
heuristic is often used by decision-makers to assess whether a certain event belongs to broader
category of events, and it involves estimating this probability based on the similarity of the event
and the category. The more similar the decision-maker finds the event and the category to be, the
more likely the decision-maker is to believe that the event belongs to the category. For example,
if a decision-maker believes that agreement among key dominant coalition members is an
important hallmark of successful projects, he or she will tend to believe the likelihood of success
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for a decision characterized by agreement among key managers to be high. The availability
heuristic is often used by decision-makers to estimate how likely it is that a certain event will
occur in the future, and it involves assessing the probability of an event occurring based on how
easily one can recall instances of that event from memory. The more easily the decision-maker
can recall from memory examples of the event occurring, the more the decision-maker believes
that the event will likely occur again in the future. For example, if a decision-maker can easily
recall instances in which a particular type of product or service has been purchased by customers
in the past, he or she is likely to believe that there is high demand in the marketplace for the
product or service.
While decision-makers in all types of organizations rely on heuristics, the leaders of
small businesses tend to rely heavily on decision-making heuristics due to the relative lack of
decision support systems and resources (Feltham et al., 2005) in such firms. Small firms often
reactively employ heuristics to quickly deal with critical problems or opportunities (Frese, Van
Gelderen, & Ombach, 2000), rather than applying the more formal (Dimitratos, Thanos, &
Petrou, 2011), bureaucratic, or politically complex decision-making processes which often
characterize larger organizations (Shrivastava & Grant, 1985). Larger organizations tend to make
more comprehensive decisions (Fredrickson & Iaquinto, 1989), involving more complex
information flows (Fahey, 1981), more analysis, and more interaction among decision makers
(Miller, Droge, & Toulouse, 1988). Small businesses are often led by the founder or a small
group of individuals, with long tenures (Gersick, Davis, Hampton, & Lansberg, 1997), who are
responsible for making all strategic decisions (Kelly, Athanassiou, & Crittenden, 2000). Such
dependence on a small number of decision-makers tends to diminish the evaluation of
information via debate (Kellermanns & Eddleston, 2004) and sharing of concerns (Zahra,
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Hayton, & Salvato, 2004), forms of evaluation that tend to surface more information. These
firms also utilize outside board members or advisors in their situational assessments infrequently
(Jaskiewicz & Klein, 2007) if at all (Pieper, Klein, & Jaskiewicz, 2008). This means that small
businesses often do not have access to this critical resource for information (Zhang, 2010) and
decision-making advice (Voordeckers, Van Gils, & Van den Heuvel, 2007) often employed by
larger firms. However, the situations that small businesses face are not necessarily any less
complex. They often involve just as much relevant information as the situations faced by larger
organizations (Von Gelderen, Frese, & Thurik, 2000). Given the above reasoning, I propose the
following relationship in Figure 1:
Proposition 1: Decision-makers in small firms rely more heavily on heuristics
than decision-makers in large firms.
---------------------------------INSERT FIGURE 1 HERE
---------------------------------While decision-makers in all small firms are dependent on heuristics which filter the
information they consider in making situational assessments, the nature of the information which
these heuristics filter depends on the dominant logic of the firm (Prahalad & Bettis, 1986). If a
firm’s dominant logic filters information about the failure of a prior course of action, it can
encourage escalation of commitment. One situation which favors this type of filtering is use of
the representativeness heuristic in firms whose dominant coalitions employ relationships logic.
According to relationships logic, the priorities of key dominant coalition members are what
decision-makers consider to be important. This is often the case in family firms. Family firms
exist at the intersection of business & family systems (McCollum, 1990), and they often pursue a
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particularly balanced set of financial and non-financial goals (Astrachan & Jaskiewicz, 2008;
Gómez-Mejia, Takács Haynes, Núñez-Nickel, Jacobson, & Moyano-Fuentes, 2007).
Achievement of such a balance often requires attentiveness to the unique financial and nonfinancial priorities of different key family decision-makers, leading to the primacy of
relationships for the dominant logic. However, the extent to which each family member’s
priorities are addressed may not be representative of the extent to which prior performance has
actually achieved the firm’s balanced set of goals.
Representativeness is often an effective heuristic for decision-making because in many
situations, similarity is indeed highly correlated with group membership (Gigerenzer &
Gaissmaier, 2011). However, there are a number of instances in which the representativeness
heuristic leads to inaccurate conclusions which may encourage escalation. First of all,
representativeness is insensitive to the base rate frequency (i.e., prior probability) of something
occurring (Tversky & Kahneman, 1974). Decision-makers tend to categorize a particular project
as successful, for example, based on just a few key indicators (Bayster & Ford, 1997), such as
market share or personal satisfaction. The market share enjoyed by a firm’s products and
services, or the satisfaction derived by an individual, however, can be caused by a number of
factors besides the project itself. Many of these causes, such as the need for the product or
service in the marketplace, or completion of a good day’s work, occur with much greater
frequency than the specific activities associated with the firm’s project. However, given human
beings’ tendency to become habituated to information over time, these more common causes
tend to go unnoticed and unconsidered by decision-makers who are focused on the novel impact
of their own project (Posner & Rothbart, 2007).
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This base rate frequency error is apt to occur in family firms due to the prominent focus
these firms place on the causal importance of certain family members’ priorities. Family leaders
are often highly esteemed by their kin, and these leaders tend to influence the mindsets, motives,
values, goals, and attitudes of other dominant coalition members in family firms (Kelly et al.,
2000). Decision-makers driven by relationships logic in such firms may misconstrue the success
of certain courses of action due to orientations toward project success indicators instilled in them
by founders (Sonfield & Lussier, 2004), such as accord among family members or leadership in
a key market niche. Such deference toward the business priorities of previous generations of
family leaders is known to interfere with financial goals such as the modernization of business
objectives and strategies (Eddleston, Otondo, & Kellermanns, 2008) as well as non-financial
goals such as the desire of younger generations of family members to establish their own
identities (Kellermans & Eddleston, 2004), leading to continued pursuit of courses of action
which fail to achieve either side of the firm’s balanced goals.
Representativeness can also lead to inaccurate conclusions because decision-makers tend
to assume that favorable descriptions are correlated with success, regardless of whether or not
the information in the description is relevant for predicting success for a certain course of action
(Tversky & Kahneman, 1974). Focusing attention on particular goals tends to heighten
awareness of information relevant for that goal (Krantz & Kunreuther, 2007), and decisionmakers tend to be more perceptive of information which indicates achievement of the goal,
rather than failure to accomplish the goal (Weber & Kirsner, 1997). This is especially the case
when the goal is personally important to the decision-maker (Schulz-Hardt, Thurow-Kröning, &
Frey, 2009). Favorable information identified early on in a situational assessment (Krosnik,
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Miller, & Tichy, 2004) can cause decision-makers to focus attention on supporting evidence for
the course of action having been successful and ignore contradictory information.
This tendency to focus on favorable descriptions is also common in family firms. In such
firms, family identity and self-esteem are often wrapped up in dominant coalition members’
perceptions of the quality of their resources, the products or services they produce (AbdelMaksoud, Dugdale, & Luther, 2005), and the success of their businesses (Denison, Lief, &
Ward, 2004). This represents a significant “sunk cost” of emotional investment in certain courses
of action, and tends to lead family firm leaders to be highly attentive to information which
reaffirms the efficacy of these courses of action. However, the salience of high levels of sunk
costs (Sleesman et al., 2012), and personal identification (Schulz-Hardt et al., 2009) with those
sunk costs, is known to encourage escalation. When decision-makers employ relationships logic
and elevate the importance key dominant coalition members’ priorities, they tend to seek out
information which reaffirms the achievement of those priorities (whether financial or nonfinancial), ignoring indicators that they may not be achieving their goals.
Representativeness can also lead to inaccurate conclusions because decision-makers often
expect that future results will be as good as or better than the previous ones, rather than
expecting regression toward the mean (Tversky & Kahneman, 1974). Learning processes tend to
update information accessed from memory by a decision-maker with the most recent information
(Weber & Johnson, 2008), leading decision-makers to expect continued meeting or exceeding of
a goal once it has been achieved in the past (Weber & Johnson, 2009). This is particularly the
case when a change in course of action is necessary. When debating whether to abandon a
project or not, decision-makers tend to look for indications that the status quo is meeting or
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exceeding the firm’s goals (Carmon & Ariely, 2000) once they have seen some sort of evidence
for success in the past.
This tendency to expect continued achievement or exceeding of goals once they have
been accomplished at some point in the past also occurs frequently in family firms. Addressing
each family member’s priorities for the importance of certain resources, for example, can lead
family businesses to focus on the “best case scenario” (Weber & Johnson, 2009) of the
performance of those resources in the past. This can lead such firms to pursue nepotistic hiring,
selection, and promotion practices (Royer, Simons, Boyd, & Rafferty, 2008) or avoid asset
divestitures (Sharma & Manikutty, 2005), failing to achieve the financial side of the firm’s
balanced goals.
Finally, representativeness tends to lead decision-makers to place great confidence in
predictions based on redundant or correlated predictor information (Tversky & Kahneman,
1974). More indicators of success tend to make decision-makers more confident that success has
occurred. However, many of these indicators may be correlated with each other, meaning that
when one indicates success, they all tend to indicate success. Focusing on redundant indicators of
success can lead decision-makers to ignore other indicators which may call into question whether
a course of action has actually been successful or not.
The importance which many family firms place on accord among decision-makers may
lead such firms to focus on redundant indicators of success. As mentioned above, family firms
often focus on certain project success indicators instilled in them by founders (Kelly et al., 2000;
Sonfield & Lussier, 2004), such as accord among family members. Given the fact that the
tendency to escalate of commitment is stronger when decision responsibility is shared (Sleesman
et al., 2012), prioritization of accord among dominant coalition members may lead to agreement
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on escalation (Myers & Lamm, 1976) due to conformity of perception and judgment among
group members (Hogg & Terry, 2000).
Given the above reasoning, I propose the following relationship in Figure 1:
Proposition 2: Ceteris paribus, decision-makers in small firms driven by
relationships logic are more likely than those in other small firms to overestimate
the extent to which past performance has achieved the firm’s goals.
While decision-makers in small family firms are apt to misconstrue the extent to which
they have achieved their goals due to their use of the representativeness heuristic to filter
information and quickly assess their situations, decision-makers small family firms in which
most of the dominant coalition members are involved in the daily management of the business
are also prone to another type of decision-making error which can lead to escalation of
commitment. In such firms, the additional influence of operational logic may lead decisionmakers to ignore negative information about the efficacy of their operations due to use of the
availability heuristic. According to operational logic, firm operations are what decision-makers
consider to be most important. This is often the case in firms where most of a firm’s dominant
coalition members are involved in firm operations. Managing firm operations requires a
significant time and energy investment from an individual (Robinson & Pearce, 1984). Such time
and energy investment tends to populate that individual’s memory and imagination with
numerous examples of the potential outcomes which can be achieved by the firm’s operating
activities (Tversky & Kahneman, 1974). However, these examples may not be accurate as
predictors of the efficacy of these operating activities for achieving particular firm goals in the
future due to the influence of other causal factors.
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Availability is often an effective heuristic for decision-making because it is indeed easier
to recall from memory instances of frequently occurring events than to recall instances of
infrequent evens (Tversky & Kanheman, 1974). However, there are certain instances in which
the availability heuristic leads to inaccurate conclusions which may encourage escalation. First
of all, availability is influenced by other factors besides the frequency of past events, such as
familiarity (Tversky & Kahneman, 1973), salience, and immediacy (Tversky & Kahneman,
1974). Individuals tend to feel a certain level of familiarity with activities in which they have
been involved consistently over a period of time, leading them to easily recall from memory the
efficacy of such activities (Sleesman et al., 2012). After investment of significant time and
energy on a project, most individuals also tend to feel a high level of personal responsibility for
these projects, which increases the salience of the project (Brockner, Houser, Lloyd, Nathanson,
Birnbaum, Deitcher, & Rubin, 1986) and makes it easier to recall from memory. Projects or
activities in which one has been involved recently are also the ones which are most easily
recalled from memory (Weber, Shafir, & Blais, 2004). While the familiarity, salience, and
immediacy of activities make it easy for an individual to recall examples of the efficacy of those
activities from memory, this may blind the same individual to examples of other activities which
may be more effective for achieving a particular goal.
The familiarity, salience, and immediacy of a firm’s operational projects are likely to be
high for dominant coalition members who are involved in the day-to-day management of a firm.
Scholars have suggested that individuals who perceive less familiarity and immediacy in a firm’s
operational projects, such as outside board members, help a firm to the generate of a wider array
of strategic alternatives than if owner–managers formulate strategies alone (Woods, Dalziel, &
Barton, 2012). Others have suggested that non-managers do not self-identify with the firm’s
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projects as much as managers (Sivanathan, Molden, Galinsky, & Ku, 2008), making the salience
of these projects for accomplishing the firm’s goals much lower for non-managers. Indeed, the
level of time investment (Soman, 2001) and sunk costs (Arkes & Blumer, 1985) in operational
projects for which firm managers feel personal responsibility and salience has been found by
scholars to lead to escalation of commitment based on feelings of experience and expertise
(Bragger et al., 2003) and the need for self-justification (Brockner et al., 1986). This may well be
caused by overestimation of the efficacy of these projects due to availability-based information
filtering.
Another reason why the availability heuristic can lead to inaccurate conclusions is that it
is sometimes easier to imagine certain events than the likelihood of those events actually
occurring (Tversky & Kahneman, 1974). After individuals work at an activity for a long time,
they tend to become familiar with the details of that activity. This allows them to easily recall
these details from memory. However, many of these details are irrelevant for the achievement of
any one specific goal. Nonetheless, people tend to weight these irrelevant details as evidence for
the efficacy of the activity (Dougherty & Sprenger, 2006). If an activity has a specific goal as its
focus, as most activities do, the presence of this goal in and of itself (Latham & Locke, 2007)
motivates an individual to look for ways that the activity can accomplish the goal. The presence
of a specific goal also encourages higher performance relative to the goal (Locke & Latham,
2002), which can encourage an individual to set even more lofty goals. However, the search for
ways that an activity can meet or exceed a certain goal can blind an individual to the ways in
which the activity may not be sufficient to accomplish the goal (Johnson, Haubl, & Keinan,
2007). Working at a particular activity for a long period of time, with a particular goal in mind,
also leads people to associate the activity with the goal. Research has shown, however, that if
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people associate two events with each other, they tend to overestimate the likelihood with which
they co-occur (Chapman & Chapman, 1967).
The tendency to overestimate the likelihood of imagined events is also likely to be high
for dominant coalition members who are involved in the day-to-day management of a firm.
Decision-makers often hold in their imagination goals they can attain, such as project
completion, rather than ones they cannot, such as a certain target profit level (Sleesman et al.,
2012). This has been shown to be mitigated by the presence of non-managers in the dominant
coalition, whose diversity (Minichilli, Zattoni, & Zona, 2009) of backgrounds (Strike, 2012) and
thought processes (Powell, 2011) helps to expand the breadth of events imagined by the
dominant coalition. The presence of such non-managers in a firm’s dominant coalition generates
cognitive conflict (Forbes & Milliken, 1999) by changing interaction norms among coalition
members (Amason & Sapienza, 1997) and encouraging certain forms of debate, such as a
decision alternatives or devil’s advocate approach (Schweiger, Sandberg, & Rechner, 1989),
which are known to generate more creative or imaginative decision options. In the absence of
challenges from non-managers, however, firm managers naturally focus their productive and
imaginative energy on ways to make their operational projects achieve or exceed the firm’s
goals. This can lead managers to overestimate the efficacy of the firm’s operational projects out
of a desire to realize the fruits of their productive and imaginative labors, leading to escalation of
commitment (Conlon & Garland, 1993).
Given the above reasoning, I propose the following relationship in Figure 1:
Proposition 3: Ceteris paribus, decision-makers in small firms driven by
operational logic are more likely than those in other small firms to overestimate
the efficacy of the firm’s operational projects.
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Based on existing escalation of commitment research, the above propositions suggest that
decision-makers in small firms which are driven by either relationships logic or operational logic
are more likely to escalate commitment, ceteris paribus, than those in small firms driven by other
forms of dominant logic. According to the propositions above, decision-makers in small firms
which are driven by relationships logic are prone to incorrect conclusions regarding whether the
firm has achieved its goals or not. If a decision-maker incorrectly identifies prior performance as
successful when, in fact, it is not, he or she is likely to continue with its prior course of action.
Continuing to pursue a course of action which, in the past, did not achieve the firm’s goals is the
definition of escalation of commitment (Staw, 1976). Decision-makers in small firms driven by
relationships logic are prone to this error due to the information they filter in their situational
assessments using the representativeness heuristic, which focuses their attention on information
which encourages three of the four (Staw, 1981) principal antecedents of escalation – selfjustification (Brockner et al., 1986), norms for consistency (Hogg & Terry, 2000), and
overestimation of the value of future success (Carmon & Ariely, 2000). According to the
propositions above, decision-makers in small firms driven by operational logic are prone to
incorrect conclusions regarding the efficacy of the firm’s operational projects. They are prone to
this error due to the information they filter in their situational assessments using the availability
heuristic, which focuses their attention on information which encourage three of the four (Staw,
1981) principal antecedents of escalation – self-justification (Brockner et al., 1986),
overestimation of the probability of future success (Bragger et al., 2003), and overestimation of
the value of future success (Conlon & Garland, 1993).
The differences in dominant logic outlined above are likely to vary across small
businesses. An interesting framework for examining these differences was recently proposed by
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Submission #14094
family business scholars in the context of debates about the appropriateness of different
corporate governance structures for different types of family firms (Lane et al., 2006). The Lane
et al. (2006) framework classifies family businesses according to the number of individuals
involved in both ownership and management. It breaks family firms down into “control” firms
(i.e., firms where a single individual or small group of individuals are involved in both
ownership and management), “dynastic” firms (i.e., firms where a large group of individuals are
involved in both ownership and management), “portfolio” firms (i.e., firms where a small
number of individuals are involved ownership, but only some are involved in management), and
“market” firms (i.e., firms where a large number of individuals are involved in ownership, but
only a handful are involved in management). While all of these firms, being family firms, follow
relationships logic to some degree, the prevalence of relationships logic in these firms is likely to
vary across these firms depending on the number of owners who share kinship ties with each
other. It is also likely that the prevalence of operational logic varies across these firms depending
on the extent to which the owners1 are involved in managing the firm.
Given the above logic, I propose the following relationships in Figure 1:
Proposition 4: Decision-makers in small family firms (i.e., control and portfolio
firms) will rely more heavily on heuristics than decision-makers in large family
firms (i.e., dynasty and market firms).
Proposition 5: Among decision-makers in small family firms (i.e., control and
portfolio firms), those in firms driven more prominently by relationships logic
(i.e., those in firms with more kinship ties among owners) are more likely to
escalate commitment, ceteris paribus.
1
Ownership is considered by scholars (Habbershohn & Pistrui, 2002) to be an indicator of dominant coalition
membership.
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Submission #14094
Proposition 6: Among decision-makers in small family firms driven prominently
by relationships logic, those in firms also driven by operational logic (i.e., control
firms) are more likely to escalate commitment than those in firms driven only by
relationships logic (i.e., portfolio firms), ceteris paribus.
Discussion
The propositions outlined above highlight the core importance of situational assessments
for strategic decision-making. Boundedly rational decision-makers invariably filter the
information which they consider when assessing their situations. Escalation of commitment, an
important measure of the effectiveness of strategic choice and firm performance, can occur when
decision-makers inaccurately assess their situations by filtering negative information about prior
performance or about the efficacy of a firm’s operating projects. Cognitive psychological
mechanisms at work in the heads of decision-makers are among the most important filters on the
information they consider, and cognitive mechanisms such as Tversky and Kahneman’s (1974)
representativeness and availability heuristics can lead decision-makers in firms driven by certain
types of dominant logic to overly focus their attention on positive information and escalate
commitment to failing courses of action.
When conducting situational assessments, decision-makers in small firms tend to depend
more on cognitive simplification processes than those in large firms. Small firms tend to lack
decision support systems and resources, but decision-makers in these firms are still required to
quickly assess a great amount of information when making decisions. To accomplish this task in
a timely manner, they tend to utilize less formal, less complex decision-making processes,
involving less comprehensive information flows, analysis, and interactions among decision-
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Submission #14094
makers. The relative handful of dominant coalition members who usually control small firms
tend to engage in little debate and minimally utilize outside information resources, allowing them
to react quickly to their situations. In doing so, cognitive mechanisms such as decision-making
heuristics are among the principal tools they use to filter information.
What information these heuristics capture, and what information they filter out, varies
depending on the dominant logic which drives decision-makers’ thinking. Decision-makers
driven by relationships logic (i.e., those who consider the priorities of key dominant coalition
members to be of principal importance) are prone to employ the representativeness heuristic to
focus their attention on information indicating that a prior course of action has been successful,
filtering out information to the contrary. In relationships logic-driven businesses such as small
family firms, this leads decision-makers to concur in making situational assessment errors such
as overestimation of the causal significance of key family members’ financial or non-financial
priorities. It also leads decision-makers in such firms to overly focus their attention on favorable
indicators of the continued high performance of their pet projects or resources. Both of these
phenomena tend to lead the leaders of such firms to inaccurately assess the extent to which prior
performance has been successful in achieving the firm’s goals.
Decision-makers driven by operational logic (i.e., those who consider firm operations to
be of principal importance) are prone to employ the availability heuristic to focus their attention
on the positive potential outcomes of operational projects, filtering out information about the
limitations of these projects and about the efficacy of other projects. This leads decision-makers
whose memory and imagination are full of examples and visions of the past and potential
outcomes of operational projects to mistake the familiarity, salience, and immediacy of these
examples and visions as indications of their superior potential performance. This phenomenon
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Submission #14094
tends to lead decision-makers in operations-focused firms to overestimate the efficacy of firm
operating activities.
Incorrectly identifying prior performance as successful and overestimating the efficacy of
firm operating activities are highly likely to lead to escalation of commitment. Decision-makers
in small firms driven by relationships logic are prone to employ the representativeness heuristic
to focus on positive indicators of past success, encouraging three of the four principal
antecedents of escalation (Staw, 1981) – self-justification, norms for consistency, and
overestimation of the value of future success. Decision-makers in small firms driven by
operational logic are prone to employ the availability heuristic to focus on positive aspects of
firm operating projects, also encouraging three of the four principal antecedents of escalation –
self-justification, overestimation of the likelihood of future success, and overestimation of the
value of future success. Given variance in the number of family members involved in the
ownership and management of different types of family firms, the dominant coalitions of control
and portfolio family firms are more likely to depend on heuristics when making decisions, and
among control and portfolio family firms with high levels of kinship ties among owners, the
dominant coalitions of control firms are most likely to escalate commitment to a failing course of
action.
Domain Limitations
The factors which influence situational assessments, strategic choices, and the ultimate
performance of business organizations are myriad. It is common in strategic management
research to focus on antecedents to these phenomena with marginal predictive power – often
reporting R-square values well below 10%. There are also myriad factors which influence
individuals’ cognition, leading psychology researchers to regularly focus on precisely-controlled
experiments in laboratory settings which allow for the isolation of individual psychological
24
Submission #14094
mechanisms. The extremely complex nature of this causal landscape justifiably leads many
strategic management scholars to question the practicality and explanatory power of research
focused on individual psychological factors (Powell, 2011; Rumelt, Schendel, & Teece, 1994).
However, practical relevance to managers’ actual decision-making tasks argues for the
importance of studying individual psychological factors in the context of strategic management
(Powell, 2011). The long-standing view within strategic management that business organizations
are a unique psychological context (Simon, 1957) also underlines the importance to the field of
psychology of studying individual cognitive mechanisms in context of strategic management.
Finally, interventions in public policy based on the manipulation of individual psychological
mechanisms have proven to have a significant impact on complex performance outcomes such as
increases in organ donation rates and savings rates (Weber & Johnson, 2009), suggesting that
they may have a similar impact on complex performance outcomes in business organizations.
While it important to study individual psychological influences on management decisionmaking, it is also important to realistically and conservatively define the domain within which
these influences contribute theoretical explanatory power. As mentioned above, the information
considered in decision-makers’ situational assessments include the content domain of a decision,
the level of uncertainty or risk about the decision’s likely outcomes, and the firm’s available
resources. Each of these types of information represents a potentially important influence on
strategic decision-making. For example, the content domain of decision (Rettinger & Hastie,
2001) is known to influence a decision maker’s attention focus on certain types of information.
The extent to which the future outcomes of a decision are uncertain, or represent the risk of
losses, is known to impact the comprehensiveness of decision makers’ situational assessments
(Miller et al., 1988). Maximum time and resource investment constraints imposed by a firm’s
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Submission #14094
level of available resources or organizational slack (Rajagopalan et al., 1993) influence the time
commitment of individuals to the decision-making process. Only when these factors are held
constant does it become possible for individual psychological factors to discernibly contribute
additional explanatory power to management decision-making research.
As mentioned above, project-specific, structural, and social factors are also known to
influence escalation of commitment behavior. For example, opportunity cost information is more
readily available for some types of projects than others, and consideration of this information is
known to discourage escalation (Northcraft & Neale, 1986). Socially, the frequent monitoring of
individuals’ decisions by others is known to encourage escalation (Kite, Katz, & Zarzeski, 1996).
Structurally, the tendency of managers to act in their own self-interest is known to encourage
escalation with respect to the interests of firm owners (Booth & Schulz, 2004). It is also
important to hold these factors constant to discern the explanatory power of individual
psychological factors in management decision-making research.
Finally, scholars have long underlined the important influence of environmental-level
factors such as complexity, environmental munificence, and strategic context, as well as firmlevel factors such as decision-making processes and decision-makers’ individual differences, on
management decision-making (Rajagopalan et al., 1993; Hutzschenreuter & Kleindienst, 2006).
For example, high environmental complexity is known to lead to greater use of cognitive
simplification processes such as selective perception, heuristics and biases, and the use of
analogies (Schwenk, 1988). Environmental munificence, or the extent to which the firm’s
environment is resource and opportunity-rich, is known to impact the rationality of decision
makers’ situational assessments (Goll & Rasheed, 1998). Features of a firm’s environmental
context, such as strategic groups (Reger & Huff, 1993), are known to influence managerial
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Submission #14094
cognition. Elements of decision-making processes such as task norms (Huse, Minichilli, &
Schoning, 2005) and characteristics (Tetlock, 2002) or alternative meeting and discussion
formats (Rajagopalan et al., 1993) also impact information filtering by elevating attention on
certain task goals. Individual differences between decision makers such as functional and
industry background, personality, and social and professional ties are also known to impact these
individuals’ cognitive frameworks (Gladstein & Reilly, 1985). Researchers of individual
psychological factors must hold these factors constant in order to contribute additional
explanatory power to management decision-making research.
Future Research
The propositions outlined above are designed to encourage future empirical research.
Such research could potentially include qualitative study of the actual use of heuristics by small
business decision makers, administration of survey instruments designed to measure dominant
logic and individual heuristic usage behaviors, laboratory or field experiments designed to isolate
the causal impact of individual heuristic usage behaviors, and archival data analysis designed to
detect evidence of escalation of commitment in certain firm populations through proxy measures.
I will address each of these elements briefly in turn.
Qualitative research. There are myriad different ways in which decision-makers apply
the representativeness and availability heuristics in real-time situational assessments. There are
also numerous different types of situational assessments which small business decision-makers
face on a regular basis. Finally, the prevalence relationships logic, operational logic, and other
types of dominant logic in the cognitive frameworks of decision-makers likely vary across
individuals, dominant coalitions, and firms. For these reasons, qualitative interviews designed to
document and categorize frequent types of heuristic use, situational assessments, and dominant
logic levels may be a good first step for empirically researching the propositions above.
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Submission #14094
Survey research. There are a number of different existing survey instruments which
psychologists have designed and vetted over the years to measure heuristic use (Busenitz &
Barney, 1997; Powell, 2011). There are also a number of existing survey instruments designed to
measure dominant logic and strategic decision-making (Miller & Friesen, 1978; Naman &
Slevin, 1993; Wang, 2008). While none of these instruments was specifically designed to
measure the real-time use of heuristics in small businesses or the forms of dominant logic
described above, they could likely be adapted to collect coarse-grained data to allow for limited
testing of the propositions above.
Laboratory & field experiments. Given the numerous control variables which would need
to be held relatively constant in order to identify significance in survey research, laboratory or
field experiments designed to isolate the impact of specific heuristic use, under conditions of
relationships logic and operational logic, may yield more statistically significant results. In a
laboratory setting, researchers could examine the use of the representativeness heuristic by
priming subjects with experimentally-blocked dominant logic (relationships logic and a “control”
form of logic) and exposing subjects to different types of external search information. In a field
setting, researchers could examine the use of the availability heuristic by examining the
information which managers in each of the four types of family firms described above (control,
dynastic, portfolio, and market) recall from memory while making real-time situational
assessments.
Archival research. Researchers could draw on existing archival data to examine whether
each of the four types of family firms described above (control, dynastic, portfolio, and market)
exhibit differences in their continued pursuit of certain key proxies of escalation, such as
product/market niche presence or retention of certain key personnel or resources, given certain
28
Submission #14094
proxies of financial and non-financial performance, such as profit margin or favorable coverage
of the family name in public media. While such research would not allow for the testing of
heuristic use, it would allow researchers to control for a number of the variables mentioned
above while testing for longitudinal changes in performance and strategic behavior.
Theoretical Contribution
This research makes several contributions to scholarly theory and extant literature. First,
this research extends the strategic management literature by examining the psychological
mechanisms for which top management characteristics have long served as a proxy in strains of
strategic management research such as upper echelons theory (Lawrence, 1997) and re-casting
existing theoretical models for strategic decision-making processes in the setting of small firms –
the world’s most common form of organization (Huse, 2000). Second, this research contributes
to the family business literature by addressing recent calls by family business scholars to apply
new theoretical frameworks focused on psychological processes (Pieper, 2010) and
environmental scanning (Ibrahim, Angelidis, & Faramarz, 2008) in family business management.
Third, this research examines an important new psychological determinant of escalation of
commitment while addresses scholars’ recent calls to expand research on the social and
structural determinants of escalation of commitment (Sleesman et al., 2012). In particular, this
research (a) proposes a different conception of the types organizational structures which may
impact escalation and (b) analyzes new interaction effects between the structural, social, and
psychological determinants of escalation. Interestingly, the study of the structural determinants
of escalation to date has focused on agency-theoretic arguments (Jensen & Mecking, 1976) about
the divergence of goals between principals and agents. Such divergence occurs predominantly in
only two of the four types of family firms identified by Lane et al. (2004), portfolio and market
firms. In control and dynastic firms, divergence of goals between principals and agents is less
29
Submission #14094
common because most of the owners are also involved in the management of the firm. This,
understandably, leads to a situation in which the managers of these firms desire to attain the
owners’ goals (Donaldson & Davis, 1989). In these types of firms, Structural factors may not
exercise a direct impact on escalation behavior, but rather an indirect effect – by determining
psychological and social influences on escalation common to these types of firms. Finally, this
research contributes to literature on the psychology of decision-making processes by examining
SME- and family firm-specific influences on the psychological mechanisms which guide the
information processing individual decision-makers. In so doing, it suggests a bridge between the
study of decision-making by psychologists and management strategists, further contributing to a
recent trend in strategic decision-making research to highlight role of the individual
(Hutzschenreuter & Kleindienst, 2006).
Practical Relevance
In addition to its contribution to extant theory, the research proposed above has the
potential to make a significant impact on practice. Private family firms are the most common
form of organization in the world, constituting up to 60% of GDP in countries such as the United
States (Astrachan & Shanker, 2003). Despite this impressive contribution to the world’s
economy, only 30% of these firms survive long-term (Kets de Vries, 1993). One of the reasons
for this low survival rate may be the fact that the leaders of these firms are prone to
psychological biases in the decision-making process which can lead to escalation of commitment
(Woods et al., 2012), resulting in firm under-performance and bankruptcy. If only 30% of the
firms which generate the majority of many countries’ GDP survive long-term, specific,
applicable prescriptions (Hutzschenreuter & Kleindienst, 2006) about how to augment the
information considered by the leaders of these firms when making strategic decisions could
improve this survivability rate and contribute to significant GDP growth in countries around the
30
Submission #14094
world. At a time when the world is recovering from a particularly crippling recession, such
stimuli for GDP growth are of acute interest to policy-makers, industry leaders, and a wide array
of scholars, educators, and practitioners working toward hastening global economic recovery.
Conclusion
This paper examines the impact of decision-making heuristics on small family business
leaders’ propensity to escalate commitment to failing courses of action. Use of heuristics such as
representativeness and availability can cause these leaders to neglect consideration of negative
information about prior firm performance and overestimate the efficacy of the firm’s operating
projects. In the absence of consideration of this negative information, these leaders are prone to
pursue courses of action which can result in firm under-performance and bankruptcy. Future
empirical investigation of the propositions above could contribute significantly to value creation
in the world’s most common form of organization, the family SME, while extending scholarly
understanding of strategic decision-making. I look forward to pursuing this research.
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Figure 1 – The Impact of Dominant Logic and Decision-Making Heuristics on Situational Assessment and Strategic Choice in
Family Firms