THE INFLUENCE OF ADVERSE SELECTION AND NEGATIVE FRAMING ON ESCALATION OF COMMITMENT IN PROJECT EVALUATION DECISIONS
Universitas Negeri Padang
The study aims at identifying factors influencing manager to continue a failing project (escalation of commitment) on project evaluation decisions based on agency and prospect theory explanation. The study hypothesized that: (1) managers experiencing adverse selection condition, (2) managers experiencing negative framing condition, and (3) managers experiencing both adverse selection and negative framing conditions will exhibit a greater tendency to continue a poorly performing project.
A laboratory experiment with 2 x 2 factorial design is conducted. Sixty-eight Executive MM and MAKSI Weekend students—as the proxy of project managers—participated in the experiment. Each subjects is presented randomly (random assignment) with one case out of four versions available. Two-way ANOVA is used in hypotheses testing.
Results indicate that the influence of adverse selection, negative framing, also both adverse selection and negative framing condition on managers’ project evaluation decisions is not statistically significant (F1=0.221, p1= 0.640, F2=0.439, p2=0.510, F3=0.350, p3=0.556). Manipulation check responses show that the experiment’s treatments is not successfully applied to most of subjects (69.81%). Therefore, subjects fail to make a project evaluation decision based on the context described in each version of cases. It is proposed that the absent of explicit instruction for subjects to read the cases several times before making a decision responsible for this result. This results should be followed up by continuing study of factors influencing project evaluation decisions based on agency and prospect theory explanation.
Keywords: adverse selection, negative framing, escalation of commitment, project evaluation decisions
Resources allocation decision is one of the important decisions in organization because of it’s long-term nature. It involves a large fund without a precise actual result known along with the long-term effect for the organization (Horngren et al., 2002). In order to obtain an optimal outcome, organization needs a long-term planning system to analyze and control such investments.
Management accounting textbooks discuss methods available for analyzing long-term investments proposals, known as capital budgeting. The term represent a budgeting process for capital assets acquisition—asset to be used for long-term purpose. Horngren et al. (2002) define capital budgeting as a decision process involving a long-term investment proposals. Approaches available for manager for analyzing investments project proposals such as discounted-cash flow, payback period, and accounting rate-of-return (Horngren et al., 2002). This approaches help manager to compare the cash outflows and cash inflows of a certain proposal. Rationally, manager will make a informed decision by approving a project with cash inflows larger than the cash outflows.
* Simposium Nasional Akuntansi 10 - Makassar
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