Is Diversity (Un)Biased? Cross Functional Teams and Project Termination Decisions

Abstract:     
One of the most challenging decisions associated with new product development (NPD) projects is their termination. Literature from a variety of research fields, spanning from psychology to operations management, confirms the difficulty of the stopping decision, even within capable organizations. Several detailed case studies iterate the often-cited claim that projects get a life of their own, and they illustrate how escalation of commitment leads to detrimental effects. Among the various reasons cited for such a systematic persistence, a prominent one is the seeming inability of NPD teams to reach a common understanding of what constitutes negative information, and, more importantly, to act upon it. To capture the critical role of such information biasing, we build our model around the concept of information fidelity, i.e. the degree of accuracy that the decision-maker assigns to the new information. Given the cross-functional nature of modern NPD teams, we posit that team members may interpret the same information differently due to different organizational roles. The goal of our study is to understand how this interpretive diversity affects project termination decisions. Our analysis reveals the complex role of diversity. Depending on the underlying project uncertainty, diversity might either become a source of conservatism, causing the team to stop projects earlier than necessary, or a source of escalation, leading to costly delays in project termination decisions. Thus, the existence of distinct thought worlds within an organization gives rise to systematic biases, even when the decision-makers are perfectly rational. Our results are robust across different team hierarchical structures, and they are magnified in the presence of social conformity. Interestingly, seemingly opposing managerial strategies, namely the diversification of the team composition and the pressure to conform to a target, may complement each other in amplifying escalation phenomena.

Keywords: Project Termination, Escalation of Commitment, Team Diversity, Information Processing

Working Paper Series