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Wednesday, November 24, 2010

The Effect of Cognitive Style and Sponsorship Bias on the Treatment of Opportunity Costs in Resources Allocation Decisions

The Effect of Cognitive Style and Sponsorship Bias on the
Treatment of Opportunity Costs in Resources Allocation Decisions

H. Alfian
(Fakultas Ekonomi Universitas Lambung Mangkurat, Banjarmasin)

Abstract

The current research seeks to identify factors that may potentially influence the way managers respond to opportunity costs when relevant data are not explicitly provided. Identification of such factors should enhance our understanding of why some managers respond to opportunity costs in ways that may be inconsistent with normative economic theory. This information could then be used to identify those situations in which structural and procedural precautions are necessary to correct limitations and biases in human information processing and so ensure the correct treatment of opportunity costs.

Disability of individual processes of perception dimension of Jungs’ typology on research of Chenhall & Morris (1991) to explain difference of managers’ way to making decision, lead us to research questions are: first, which cognitive style combination have a proclivity to incorporate implicit opportunity costs in their economic analysis? Second, used of two dimensions of cognitive style, will project sponsorship encourage managers to ignore negative economic signals derived from opportunity costs that are nevertheless relevant to the resource allocation decision?

A laboratory experiment with 2x4 factorial designs was used to investigating the effect of cognitive style on the managers’ decision of opportunity costs in situation of absence sponsorship or not. The results indicated that intuitive managers tended to incorporate opportunity costs in their decisions whereas sensation individuals appeared to focus more on the directness of the relationship between expenditure and a project to determine the relevance of the cost. Opportunity cost implications tended not to be identified by the sensation group. Evidence was found that sponsorship moderated the influence of cognitive style on decision to include opportunity costs.


Keywords: Cognitive style, sponsorship bias, and opportunity cost


1. INTRODUCTION

The incorporation of opportunity costs into resources allocation decisions is stressed in normative approaches to both management accounting (Horngren & Foster, 1987) and capital budgeting (Brealy & Myers, 1984). However, empirical evidence on the way managers respond to opportunity costs has revealed a variety of behaviours. Some studies have demonstrated that managers do include opportunity costs (Neumann & Friedman, 1978; Friedman & Neumann, 1980), while others have questioned whether decision makers correctly include the concept in their resources allocation decisions (Becker et al., 1974; Buzzell & Chussil, 1985; Northcraft & Wolf, 1984; Kaplan, 1986). Several studies have demonstrated that decision makers tend to include opportunity cost data only when explicitly provided (Friedman & Neumann, 1980; Northcraft & Neale, 1986). However, research on decision making in organizations indicates that managers frequently lack knowledge about alternatives (March, 1987). Typically, managers do not have explicit and relevant information on a well-defined set of alternatives. March (1987) refers to the identification of alternatives as the main uncertainty facing managers in the decision making process. Chenhall & Morris (1991) examined how managers treat opportunity costs in the common decision situation where explicit information on these costs is lacking. Chenhall & Morris (1991) argued that decision makers’ cognitive style , and the existence of project sponsorship, will influence their response to opportunity costs in situations in which the relevant information is implicit. 

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Simposium Nasional Akuntansi 11
Download:
http://www.ziddu.com/download/12655494/paper3.doc.html

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