When do Opportunity Costs Count? Vague Opportunity Costs, Project Completion Stage and Management Accounting Experience

Abstract:     
Although prior research has established the importance of opportunity costs and identified factors influencing their inclusion in decisional analyses, researchers have overlooked several factors likely to be present in an actual managerial setting. In an experiment, I investigate how two situational factors, vagueness of opportunity cost presentation and stage of project completion, affect individuals' tendency to attend to opportunity costs. I also investigate how attending to opportunity costs affects project continuance judgments and decisions. The two situational factors are examined across two groups of participants with varying levels of management accounting experience. I find that vagueness of opportunity cost presentation and a nearly complete project decrease inexperienced participants' attention to opportunity costs. Experience moderates the effect of these factors as experienced participants attend to opportunity costs despite presence of the two situational factors. The tendency to continue a project is influenced by the number of opportunity costs attended to and experience.

Number of Pages in PDF File: 44

Keywords: Opportunity costs, vagueness, management accounting experience, completion effect, project completion stage

JEL Classification: M40, M46

working papers series