The Efficacy of Third-Party Consultation in Preventing Managerial Escalation of Commitment: The Role of Mental Representations

Abstract:     
Avoiding continued investment in poorly performing projects is an important function of management control systems. However, prior research suggests that managers fail to use accounting information indicating that a project is performing poorly to discontinue it; that is, they escalate commitment to the project. We perform two experiments to investigate the efficacy of a potential control mechanism, third-party consultation, in preventing managerial escalation of commitment. We hypothesize that the information-processing objective (i.e., purpose) assigned to consultants influences the mental representations they construct to process and store information, which ultimately influences their recommendations regarding the continuation of a poorly performing project. Results suggest that consultants will not construct mental representations amenable to making high-quality project-continuation recommendations unless they are assigned that specific purpose. Results further suggest that applying additional effort likely will not overcome the adverse effects of having inappropriate mental representations when making project-continuation recommendations. An implication of our study is that third-party consultants likely will not prevent managerial escalation of commitment unless consultants have a specific mandate of making a project-continuation recommendation in mind when they encounter relevant accounting information.

Keywords: escalation of commitment, mental representations, justification, accountability

JEL Classifications: M40, M46, G31

Working Paper Series