The Influence of Probability Discounting on Escalation in Information Technology Projects

The Influence of Probability Discounting on Escalation in Information Technology Projects

Hilde Mobekk (Oslo and Akershus University College of Applied Sciences, Oslo, Norway), Asle Fagerstrøm (Institute of Technology, Westerdals Oslo School of Arts, Communication and Technology, Oslo, Norway) and Donald A. Hantula (Department of Psychology, Temple University, Philadelphia, PA, USA)
DOI: 10.4018/IJITPM.2018010102

Abstract

An experimental study was conducted with 17 experienced information technology (IT) project decision-makers. Each participated in a computer based simulation where they had to choose whether to continue an ongoing IT project despite negative feedback, (called escalation of commitment), or abandon it and sell the project as is. A titration procedure for sales price was manipulated over seven probability conditions for success of the project. The switching points where each participant would choose to sell the project instead of continuing development was determined, and probability discounting factors were calculated. The median switching point of the participant's subjective values of the project fit a hyperbolic discounting function well. An escalation factor was calculated and the results indicate that several participants in the study showed signs of escalation. These data demonstrate that the discounting framework may be a viable approach to understand the phenomenon of escalation in IT projects.
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Introduction

In early 1993, the London Stock Exchange abandoned the development of its Taurus paperless share settlement system after more than 10 years of development. USD 134 million was wasted, and almost all of the 360 or so workers involved in the project were jobless. In addition, USD 670 million were used in other organizations preparing for the new system (Drummond, 1996b). Car rental company Avis Europe canceled in 2004 an Enterprise Resource Planning (ERP) system after spending USD 54.5 million (Best, 2004). Up until then, the ERP project was substantially delayed and as a consequence increased costs related to problem with design and implementation. In 2008, the airline carrier Qantas pulled the plug after spending USD 40 million on its Jetsmart parts management system (Krigsman, 2008). Challenges in this project started as early as 2004 when employees were alerted that the system would increase workload. Decision-makers continued the project nonetheless. As these examples and others (Drummond, 1996a, 1996c; Ewusi-Mensah, 2003; Mähring & Keil, 2008; Simon, 2009; Zahra, Hamdi, & Ali, 2014) illustrate, many IT projects go wildly over budget, drag on long past their originally scheduled completion date, and do not deliver according to initial specifications. For example, Miller, Dawson, Miller, and Bradley (2008) found that only 42% of the IT projects covered by their study were completed within 10% of initial schedule, cost and functionality and the Standish Group International (2009) state that in 2000 and 2008 28% and 32% of IT projects were executed according to plan. Software- and trade magazines regularly publish a list of the top-ten corporate IT failures (Barker, 2007; Nash, 2000).

According to Drummond and Hodgson (2011) escalation involves a continuing cycle of active reinvestment beyond economic rationality in response to negative feedback. Ross and Staw (1986) state that according to classical economic rational choice theory, one would expect decision-makers to pull the plug as negative consequences and feedback is received. However, this does not seem to happen in many cases. Ewusi-Mensah (2003) contends that despite best efforts and well planned software projects, as much as one third of projects may end up as failures (Wright & Capps III, 2010) and sometimes become “runaway projects” endangering the entire organization (Bharadwaj, Keil, & Mähring, 2009). “Runaway systems” are, like a runaway train, projects that are out of control, hard to stop, and in need of redirection or termination (Keil, Rai, Cheney Mann, & Zhang, 2003; Mähring & Keil, 2008). Indeed, escalation situations in IT projects can have severe consequences (Keil & Mähring, 2010). According to Ewusi-Mensah (2003) the cost of software projects that fail or are abandoned amounts to billions of dollars a year in the United States alone.

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