IDEAS home Printed from https://ideas.repec.org/a/inm/ormnsc/v66y2020i5p1999-2016.html
   My bibliography  Save this article

A Behavioral Study on Abandonment Decisions in Multistage Projects

Author

Listed:
  • Xiaoyang Long

    (Wisconsin School of Business, University of Wisconsin–Madison, Madison, Wisconsin 53706;)

  • Javad Nasiry

    (School of Business and Management, Hong Kong University of Science and Technology, Clear Water Bay, Kowloon, Hong Kong SAR, Hong Kong;)

  • Yaozhong Wu

    (Business School, National University of Singapore, Singapore 119245)

Abstract

In uncertain environments, project reviews provide an opportunity to make “continue or abandon” decisions and thereby maximize a project’s expected payoff. We experimentally investigate continue/abandon decisions in a multistage project under two conditions: when the project is reviewed at every stage and when review opportunities are limited. Our results confirm findings in the literature that project abandonment tends to be delayed; yet, we also observe premature termination. Decisions are highly path dependent; in particular, subjects are more likely to abandon after observing reduced project value, and abandonment rate is higher near the middle—rather than near the beginning or end—of a project. Interestingly, when reviews are limited, subjects are less likely to continue a project that should be abandoned. At the same time, subjects are more inclined to review again after receiving negative (rather than positive) news. Our data are explained well by a model that incorporates three behavioral concepts—gains or losses from comparing the project value with an internal adaptive reference point, sunk cost bias, and status quo bias. Our work suggests that more frequent reviews need not lead to better project performance, and it also identifies contexts in which outside intervention is most valuable in project decision making.

Suggested Citation

  • Xiaoyang Long & Javad Nasiry & Yaozhong Wu, 2020. "A Behavioral Study on Abandonment Decisions in Multistage Projects," Management Science, INFORMS, vol. 66(5), pages 1999-2016, May.
    • Handle: RePEc:inm:ormnsc:v:66:y:2020:i:5:p:1999-2016
    DOI: 10.1287/mnsc.2018.3270
    as

    Download full text from publisher

    File URL: https://doi.org/10.1287/mnsc.2018.3270
    Download Restriction: no
    File URL: https://libkey.io/10.1287/mnsc.2018.3270?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Roberts, Kevin & Weitzman, Martin L, 1981. "Funding Criteria for Research, Development, and Exploration Projects," Econometrica, Econometric Society, vol. 49(5), pages 1261-1288, September.
    2. Teck-Hua Ho & Noah Lim & Tony Haitao Cui, 2010. "Reference Dependence in Multilocation Newsvendor Models: A Structural Analysis," Management Science, INFORMS, vol. 56(11), pages 1891-1910, November.
    3. Dirk Bergemann & Ulrich Hege & Liang Peng, 2008. "Venture Capital and Sequential Investments," Cowles Foundation Discussion Papers 1682R2, Cowles Foundation for Research in Economics, Yale University, revised Oct 2009.
    4. Thierry Post & Martijn J. van den Assem & Guido Baltussen & Richard H. Thaler, 2008. "Deal or No Deal? Decision Making under Risk in a Large-Payoff Game Show," American Economic Review, American Economic Association, vol. 98(1), pages 38-71, March.
    5. Ido Erev & Eyal Ert & Alvin E. Roth, 2010. "Erev, I. et al . A Choice Prediction Competition for Market Entry Games: An Introduction. Games 2010, 1 , 117-136," Games, MDPI, vol. 1(3), pages 1-5, July.
    6. Leonardo P. Santiago & Pirooz Vakili, 2005. "On the Value of Flexibility in R&D Projects," Management Science, INFORMS, vol. 51(8), pages 1206-1218, August.
    7. Berg, Joyce E. & Dickhaut, John W. & Kanodia, Chandra, 2009. "The role of information asymmetry in escalation phenomena: Empirical evidence," Journal of Economic Behavior & Organization, Elsevier, vol. 69(2), pages 135-147, February.
    8. Tingliang Huang & Gad Allon & Achal Bassamboo, 2013. "Bounded Rationality in Service Systems," Manufacturing & Service Operations Management, INFORMS, vol. 15(2), pages 263-279, May.
    9. Stylianos (Stelios) Kavadias, 2014. "10-year Anniversary of the New Product Development, R&D, and Project Management Department in Production and Operations Management—Progress, Thoughts, and Perspectives," Production and Operations Management, Production and Operations Management Society, vol. 23(8), pages 1259-1264, August.
    10. Svenja Sommer & Stylianos Kavadias, 2009. "The Effects of Problem Structure and Team Diversity on Brainstorming Effectiveness," Post-Print hal-00491685, HAL.
    11. R. Preston Mcafee & Hugo M. Mialon & Sue H. Mialon, 2010. "Do Sunk Costs Matter?," Economic Inquiry, Western Economic Association International, vol. 48(2), pages 323-336, April.
    12. Daniel Kahneman & Amos Tversky, 2013. "Prospect Theory: An Analysis of Decision Under Risk," World Scientific Book Chapters, in: Leonard C MacLean & William T Ziemba (ed.), HANDBOOK OF THE FUNDAMENTALS OF FINANCIAL DECISION MAKING Part I, chapter 6, pages 99-127, World Scientific Publishing Co. Pte. Ltd..
    13. Samuelson, William & Zeckhauser, Richard, 1988. "Status Quo Bias in Decision Making," Journal of Risk and Uncertainty, Springer, vol. 1(1), pages 7-59, March.
    14. Yaozhong Wu & Karthik Ramachandran & Vish Krishnan, 2014. "Managing Cost Salience and Procrastination in Projects: Compensation and Team Composition," Production and Operations Management, Production and Operations Management Society, vol. 23(8), pages 1299-1311, August.
    15. He, Xin & Mittal, Vikas, 2007. "The effect of decision risk and project stage on escalation of commitment," Organizational Behavior and Human Decision Processes, Elsevier, vol. 103(2), pages 225-237, July.
    16. Eduard Calvo & Ruomeng Cui & Juan Camilo Serpa, 2019. "Oversight and Efficiency in Public Projects: A Regression Discontinuity Analysis," Management Science, INFORMS, vol. 65(12), pages 5651-5675, December.
    17. Ioana Popescu & Yaozhong Wu, 2007. "Dynamic Pricing Strategies with Reference Effects," Operations Research, INFORMS, vol. 55(3), pages 413-429, June.
    18. Arnd Huchzermeier & Christoph H. Loch, 2001. "Project Management Under Risk: Using the Real Options Approach to Evaluate Flexibility in R...D," Management Science, INFORMS, vol. 47(1), pages 85-101, January.
    19. Heath, Chip, 1995. "Escalation and De-escalation of Commitment in Response to Sunk Costs: The Role of Budgeting in Mental Accounting," Organizational Behavior and Human Decision Processes, Elsevier, vol. 62(1), pages 38-54, April.
    20. William Boulding & Abhijit Guha & Richard Staelin, 2017. "Do We Really Need to Change the Decision Maker? Counterintuitive Escalation of Commitment Results in Real Options Contexts," Management Science, INFORMS, vol. 63(10), pages 3459-3472, October.
    21. Stylianos Kavadias & Svenja C. Sommer, 2009. "The Effects of Problem Structure and Team Diversity on Brainstorming Effectiveness," Management Science, INFORMS, vol. 55(12), pages 1899-1913, December.
    22. Ido Erev & Eyal Ert & Alvin E. Roth, 2010. "A Choice Prediction Competition for Market Entry Games: An Introduction," Games, MDPI, vol. 1(2), pages 1-20, May.
    23. Ert, Eyal & Erev, Ido, 2008. "The rejection of attractive gambles, loss aversion, and the lemon avoidance heuristic," Journal of Economic Psychology, Elsevier, vol. 29(5), pages 715-723, November.
    24. Elena Katok & Enno Siemsen, 2011. "Why Genius Leads to Adversity: Experimental Evidence on the Reputational Effects of Task Difficulty Choices," Management Science, INFORMS, vol. 57(6), pages 1042-1054, June.
    25. repec:cup:judgdm:v:8:y:2013:i:3:p:214-235 is not listed on IDEAS
    26. Duncan Simester & Juanjuan Zhang, 2010. "Why Are Bad Products So Hard to Kill?," Management Science, INFORMS, vol. 56(7), pages 1161-1179, July.
    27. Niklas Karlsson & George Loewenstein & Duane Seppi, 2009. "The ostrich effect: Selective attention to information," Journal of Risk and Uncertainty, Springer, vol. 38(2), pages 95-115, April.
    28. Arkes, Hal R. & Blumer, Catherine, 1985. "The psychology of sunk cost," Organizational Behavior and Human Decision Processes, Elsevier, vol. 35(1), pages 124-140, February.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Ronald Klingebiel & Peter Esser, 2020. "Stage-Gate Escalation," Strategy Science, INFORMS, vol. 5(4), pages 311-329, December.
    2. Fábio Chaves Nobre & Maria José de Camargo Machado & Liana Holanda Nepomuceno Nobre, 2022. "Behavioral Biases and the Decision-Making in Entrepreneurs and Managers," RAC - Revista de Administração Contemporânea (Journal of Contemporary Administration), ANPAD - Associação Nacional de Pós-Graduação e Pesquisa em Administração, vol. 26(sup2022), pages 200369-2003.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. repec:cup:judgdm:v:8:y:2013:i:3:p:214-235 is not listed on IDEAS
    2. Eyal Ert & Ido Erev, 2013. "On the descriptive value of loss aversion in decisions under risk: Six clarifications," Judgment and Decision Making, Society for Judgment and Decision Making, vol. 8(3), pages 214-235, May.
    3. Mujcic, Redzo & Powdthavee, Nattavudh, 2022. "How Do Humans Respond to Huge Financial Losses?," IZA Discussion Papers 15536, Institute of Labor Economics (IZA).
    4. Negrini, Marcello & Riedl, Arno & Wibral, Matthias, 2022. "Sunk cost in investment decisions," Journal of Economic Behavior & Organization, Elsevier, vol. 200(C), pages 1105-1135.
    5. Nektarios Oraiopoulos & Stylianos Kavadias, 2020. "Is Diversity (Un-)Biased? Project Selection Decisions in Executive Committees," Manufacturing & Service Operations Management, INFORMS, vol. 22(5), pages 906-924, September.
    6. Marcello Negrini & Arno Riedl & Matthias Wibral, 2020. "Still in Search of the Sunk Cost Bias," CESifo Working Paper Series 8623, CESifo.
    7. Louis Lévy-Garboua & Claude Montmarquette, 1996. "Cognition In Seemingly Riskless Choices And Judgments," Rationality and Society, , vol. 8(2), pages 167-185, May.
    8. Zhang, nan & Qin, Botao, 2020. "Reference point adaptation and air quality – Experimental evidence with anti-PM 2.5 facemasks from China," MPRA Paper 102935, University Library of Munich, Germany.
    9. Ofir Yakobi & Doron Cohen & Eitan Naveh & Ido Erev, 2020. "Reliance on small samples and the value of taxing reckless behaviors," Judgment and Decision Making, Society for Judgment and Decision Making, vol. 15(2), pages 266-281, March.
    10. repec:tkp:ijsrsy:v:2:y:2012:i:2:p:73-91 is not listed on IDEAS
    11. Gino, Francesca, 2008. "Do we listen to advice just because we paid for it? The impact of advice cost on its use," Organizational Behavior and Human Decision Processes, Elsevier, vol. 107(2), pages 234-245, November.
    12. Daniel Friedman & Kai Pommerenke & Rajan Lukose & Garrett Milam & Bernardo Huberman, 2007. "Searching for the sunk cost fallacy," Experimental Economics, Springer;Economic Science Association, vol. 10(1), pages 79-104, March.
    13. Kuhberger, Anton, 1998. "The Influence of Framing on Risky Decisions: A Meta-analysis," Organizational Behavior and Human Decision Processes, Elsevier, vol. 75(1), pages 23-55, July.
    14. Ronayne, David & Sgroi, Daniel & Tuckwell, Anthony, 2021. "Evaluating the sunk cost effect," Journal of Economic Behavior & Organization, Elsevier, vol. 186(C), pages 318-327.
    15. Tingliang Huang & Zhe Yin & Ying-Ju Chen, 2017. "Managing Posterior Price Matching: The Role of Customer Boundedly Rational Expectations," Manufacturing & Service Operations Management, INFORMS, vol. 19(3), pages 385-402, July.
    16. Necati Tereyağoğlu & Peter S. Fader & Senthil Veeraraghavan, 2018. "Multiattribute Loss Aversion and Reference Dependence: Evidence from the Performing Arts Industry," Management Science, INFORMS, vol. 64(1), pages 421-436, January.
    17. Ido Erev & Sharon Gilat-Yihyie & Davide Marchiori & Doron Sonsino, 2015. "On loss aversion, level-1 reasoning, and betting," International Journal of Game Theory, Springer;Game Theory Society, vol. 44(1), pages 113-133, February.
    18. Maximilian Rüdisser & Raphael Flepp & Egon Franck, 2017. "Do casinos pay their customers to become risk-averse? Revising the house money effect in a field experiment," Experimental Economics, Springer;Economic Science Association, vol. 20(3), pages 736-754, September.
    19. Marzieh ShahmariChatghieh & Harri Haapasalo & Anyanitha Distanont, 2013. "A Comparison of R&D Supply Chains and Service and Manufacturing Supply Chains," International Journal of Synergy and Research, ToKnowPress, vol. 2(2), pages 73-91.
    20. Donald R. Lehmann & Jeffrey R. Parker, 2017. "Disadoption," AMS Review, Springer;Academy of Marketing Science, vol. 7(1), pages 36-51, June.
    21. Hermans, Ben & Leus, Roel & Looy, Bart Van, 2023. "Deciding on scheduling, secrecy, and patenting during the new product development process: The relevance of project planning models," Omega, Elsevier, vol. 116(C).
    22. Andrea Sorensen, 2018. "Creating a Domain of Losses in the Laboratory: Effects of Endowment Size," Games, MDPI, vol. 9(1), pages 1-14, March.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:inm:ormnsc:v:66:y:2020:i:5:p:1999-2016. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Chris Asher (email available below). General contact details of provider: https://edirc.repec.org/data/inforea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.