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Managerial Mental Accounting and Downstream Project Decisions

Author

Listed:
  • Manel Baucells

    (Darden School of Business, University of Virginia, Charlottesville, Virginia 22903)

  • Yael Grushka-Cockayne

    (Darden School of Business, University of Virginia, Charlottesville, Virginia 22903)

  • Woonam Hwang

    (David Eccles School of Business, University of Utah, Salt Lake City, Utah 84112)

Abstract

Project leaders are responsible for planning, controlling, and revising projects. As a project unfolds, the leader evaluates the project’s progress by comparing ongoing costs and scope to a baseline plan and considers potential revisions. We offer a general model of managerial mental accounting, which includes loss aversion, reference point updating, and narrow framing, and examine how it impacts downstream decisions. Our model predicts insufficient adjustments of project scope and cost at revision, resulting in reduced financial profit. We show that the choice of measure to quantify the project progress—planned, actual, or earned—affects the updating of reference points, and hence the downstream decisions. Thus, progress measures could be wisely employed to mitigate insufficient adjustments. It turns out that measuring progress via planned scope is often advantageous, whereas utilizing earned value for cost is never advisable.

Suggested Citation

  • Manel Baucells & Yael Grushka-Cockayne & Woonam Hwang, 2024. "Managerial Mental Accounting and Downstream Project Decisions," Management Science, INFORMS, vol. 70(12), pages 8612-8630, December.
    • Handle: RePEc:inm:ormnsc:v:70:y:2024:i:12:p:8612-8630
    DOI: 10.1287/mnsc.2021.02929
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