For Small Business Owners, Consultation Means Fewer Missteps

Research sheds light on the ‘escalation of commitment’ phenomenon and how to avoid it

If small business owners want to avoid costly mistakes, it pays to consult with others.

That’s the finding of new research from the University of Cincinnati, which focused on escalation of commitment, a phenomenon where business owners justify increased investment in a course of action based on the cumulative prior investment, even if the cumulative cost of continuing with the original course of action outweighs the expected benefits.

“In other words, small business owners continue to pursue failing ventures simply to prove that they were right,” says researcher and one-time entrepreneur Jeremy Woods, a doctoral student in UC’s College of Business.

“We’ve all had the ‘I’m going to make this work’ feeling, but sometimes the best decision is to walk away: an action that doesn’t come easy for driven and determined entrepreneurs.”

Woods’ interest in small business decision-making mistakes stems from his experience as the owner of a licensing business in the international music industry, a time when he made serious errors related to product design and pricing.

Fortunately, according to Woods’ research, small business owners can avoid the escalation of commitment phenomenon by systematically seeking the input of respected colleagues.

“Consultation with outside advisors can bring more information and fresh perspectives into the decision-making process and convince business owners to pursue alternative options,” says Woods, who based his research on the Panel Study of Entrepreneurial Dynamics, a national questionnaire sponsored by business professors studying entrepreneurship.

The questionnaire surveyed more than 1,200 startup business owners across the country. Woods mined the data and discovered a significant correlation between consulting with outside advisors and achieving revenues sooner.