Managerial Mental Accounting and Downstream Project Decisions

50 Pages Posted: 4 Nov 2018 Last revised: 15 Mar 2023

See all articles by Manel Baucells

Manel Baucells

University of Virginia - Darden School of Business

Yael Grushka-Cockayne

University of Virginia - Darden School of Business

Woonam Hwang

University of Utah - David Eccles School of Business

Date Written: March 11, 2023

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 revisions, resulting in reduced financial profit. Loss aversion is harmful but only up to a point; and reference point updating may lessen or worsen insufficient adjustments. We show that the choice of measure to quantify the project progress—planned, actual, or earned—affects the updating of the reference point, and hence the downstream decisions. Thus, progress measures could be wisely employed to mitigate insufficient adjustments. It turns out that planned scope is often advantageous, whereas earned value for cost is never advisable.

Keywords: project management, behavioral operations, mental accounting, earned value analysis

Suggested Citation

Baucells, Manel and Grushka-Cockayne, Yael and Hwang, Woonam, Managerial Mental Accounting and Downstream Project Decisions (March 11, 2023). Darden Business School Working Paper No. 3265724, Available at SSRN: https://ssrn.com/abstract=3265724 or http://dx.doi.org/10.2139/ssrn.3265724

Manel Baucells

University of Virginia - Darden School of Business ( email )

P.O. Box 6550
Charlottesville, VA 22906-6550
United States

Yael Grushka-Cockayne

University of Virginia - Darden School of Business ( email )

P.O. Box 6550
Charlottesville, VA 22906-6550
United States

Woonam Hwang (Contact Author)

University of Utah - David Eccles School of Business ( email )

1645 E Campus Center Dr
Salt Lake City, UT 84112-9303
United States

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