A Behavioral Study on Abandonment Decisions in Multistage Projects

Xiaoyang Long (), Javad Nasiry () and Yaozhong Wu ()
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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

Management Science, 2020, vol. 66, issue 5, 1999-2016

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.

Keywords: project management; continue/abandon decisions; reference dependence; sunk cost effect; status quo bias (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (3)

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