Managerial Mental Accounting and Downstream Project Decisions

Manel Baucells (), Yael Grushka-Cockayne () and Woonam Hwang ()
Additional contact information
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

Management Science, 2024, vol. 70, issue 12, 8612-8630

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.

Keywords: project management; behavioral operations; mental accounting; earned value analysis (search for similar items in EconPapers)
Date: 2024
References: Add references at CitEc
Citations:

Downloads: (external link)
http://dx.doi.org/10.1287/mnsc.2021.02929 (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:70:y:2024:i:12:p:8612-8630

Access Statistics for this article

More articles in Management Science from INFORMS Contact information at EDIRC.
Bibliographic data for series maintained by Chris Asher ().