The Escalation of Commitment in the NBA: a Current and Improved Evaluation (2014)

Undergraduate: Matthew McCauley

Faculty Advisor: Rita Balaban
Department: Economics

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Traditional economic theory suggests that decision makers should not allow sunk costs to shape future actions. However, empirical studies have found a commensurate relationship between sunk costs and future expenditures when expected marginal costs exceed expected marginal benefits, an idea referred to as the ¿escalation of commitment.¿ With large sunk costs annually incurred through player drafts, executives in the high-stakes business of professional sports may be particularly prone to the escalation of commitment. This research will specifically examine the National Basketball Association (NBA), evaluate teams¿ personnel decisions and determine the prevalence of escalation of commitment in the league. Previous studies on this topic have not utilized the most accurate performance measures, have not been updated through the recent Collective Bargaining Agreements (CBAs) and have not fully encompassed the theoretical literature. This study anticipates that a careful consideration of the latest theory and improved models will lead to less escalation of commitment than what has been found in previous studies. In effect, this study anticipates finding more rational behavior among NBA decision makers. Early estimation shows that escalation is lower in magnitude and shorter in duration than in previous studies.