A Behavioral Study on Abandonment Decisions in Multi-Stage Projects

Management Science, 66(5), 1999-2016, 2020

30 Pages Posted:

See all articles by Xiaoyang Long

Xiaoyang Long

University of Wisconsin - Madison - School of Business

Javad Nasiry

McGill University

Yaozhong WU

National University of Singapore - Business School

Date Written: November 29, 2018

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 multi-stage 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

Suggested Citation

Long, Xiaoyang and Nasiry, Javad and Wu, Yaozhong, A Behavioral Study on Abandonment Decisions in Multi-Stage Projects (November 29, 2018). Management Science, 66(5), 1999-2016, 2020, Available at SSRN: https://ssrn.com/abstract=

Xiaoyang Long (Contact Author)

University of Wisconsin - Madison - School of Business ( email )

Madison, WI
United States

Javad Nasiry

McGill University ( email )

1001 Sherbrooke St. West
Montreal
Canada

HOME PAGE: http://https://www.mcgill.ca/desautels/javad-nasiry

Yaozhong Wu

National University of Singapore - Business School ( email )

1 Business Link
Singapore, 117592
Singapore

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