THE EFFECT OF COGNITIVE STYLE AND SPONSORSHIP BIAS ON THE TREATMENT OF OPPORTUNITY COSTS IN...

Abstract The incorporation of opportunity cost is stressed in normative approaches to resource allocation decisions. Empirical evidence has revealed a variety of behaviours. A consequence of inappropriate treatment of opportunity costs is an incorrect assessment of the economic consequences of resource allocation decisions. Improved understanding of why some managers treat opportunity costs inappropriately permits identifying situations where the incorrect economic evaluations will lead to sub-optimal resource allocation and therefore provides a basis for remedial action. This study identifies two conditional factors which potentially influence the way managers respond to opportunity cost information. These factors are managers' cognitive style and whether or not managers sponsor a project (project sponsorship), and it is argued that they influence managers' decisions on opportunity costs in situations in which opportunity cost implications are implicit. In particular, the paper proposes, first, that in the absence of project sponsorship, managers with an “intuitive” style of “taking in data” will tend to incorporate opportunity costs in their economic decisions whereas those wiht a “sensation” style will not. Second, it is suggested that because sponsorship encourages managers to ignore negative economic signals (sponsorship bias) any effects of cognitive style will be moderated in conditions where sponsorship is evident. A laboratory experiment with managers as subjects was used to examine these propositions. The results indicated that intuitive managers tended to incorporate opportunity costs in their decisions whereas sensation individuals appeared to focus more on the directness of the relationship between expenditure and a project to determine the relevance of the cost. Opportunity cost implications tended not to be identified by the sensation group. Evidence was found that sponsorship moderated the influence of cognitive style on decisions to include opportunity costs.

[1]  B. M. Staw.  The Escalation of Commitment To a Course of Action , 1981 .

[2]  B. Neumann,et al.  Opportunity Costs: Further Evidence Through an Experimental Replication , 1978 .

[3]  Charles H. Schwenk.  Information, Cognitive Biases, and Commitment to a Course of Action , 1986 .

[4]  G. Northcraft,et al.  Opportunity costs and the framing of resource allocation decisions , 1986 .

[5]  Peter G. W. Keen,et al.  Cognitive Style Research: A Perspective for Integration , 2015, ICIS.

[6]  W. Hamilton,et al.  Cognitive Style and the Acceptance of Management Science Recommendations , 1973 .

[7]  Kenneth J. White,et al.  A GENERAL COMPUTER PROGRAM FOR ECONOMETRIC METHODS- SHAZAM , 1978 .

[8]  Gregory B. Northcraft,et al.  Dollars, Sense, and Sunk Costs: A Life Cycle Model of Resource Allocation Decisions , 1984 .

[9]  D. Schweiger.  Measuring managerial cognitive styles: On the logical validity of the Myers-Briggs Type Indicator , 1985 .

[10]  Karl E. Weick,et al.  An Assessment Of Laboratory Experiments In Accounting , 1982 .

[11]  R. Hoskin.  Opportunity Cost and Behavior , 1983 .

[12]  O. Williamson,et al.  Corporate Control and Business Behavior. , 1971 .

[13]  Lawrence J. Gitman,et al.  A Survey of Capital Budgeting Techniques Used by Major U.S. Firms , 1977 .

[14]  Tibor Barna,et al.  Investment and Growth Policies in British Industrial Firms , 1962 .

[15]  Barry M. Staw,et al.  Knee-deep in the Big Muddy: A study of escalating commitment to a chosen course of action. , 1976 .

[16]  B. Neumann,et al.  The Effects Of Opportunity Costs On Project Investment Decisions - A Replication And Extension , 1980 .

[17]  Miklos A. Vasarhelyi,et al.  Man-Machine Planning Systems: A Cognitive Style Examination of Interactive Decision Making , 1977 .

[18]  Barry M. Staw,et al.  Commitment to a Policy Decision: A Multi-Theoretical Perspective. , 1978 .

[19]  I. B. Myers.  Manual: A Guide to the Development and Use of the Myers-Briggs Type Indicator , 1985 .

[20]  B. K. Blaylock,et al.  COGNITIVE STYLE AND THE USEFULNESS OF INFORMATION , 1984 .

[21]  G. Huber.  Cognitive Style as a Basis for MIS and DSS Designs: Much ADO About Nothing? , 1983 .

[22]  John W. Slocum,et al.  Decision-Making Style and Acquisition of Information: Further Exploration of the Myers-Briggs Type Indicator , 1981 .

[23]  H. Simon,et al.  Selective perception: A note on the departmental identifications of executives. , 1958 .

[24]  J. L. Bower.  Managing the resource allocation process: A study of corporate planning and investment , 1970 .

[25]  M. S. Mayzner,et al.  Cognition And Reality , 1976 .

[26]  Charles R. Schwenk,et al.  Conjectures on Cognitive Simplification in Acquisition and Divestment Decision Making , 1985 .

[27]  J. March.  Ambiguity and accounting: The elusive link between information and decision making☆ , 1987 .

[28]  Joel Brockner,et al.  Factors affecting withdrawal from an escalating conflict: Quitting before it's too late , 1979 .

[29]  Joshua Ronen,et al.  Opportunity Costs-An Experimental Approach , 1974 .

[30]  Robert W. Zmud.  Note—On the Validity of the Analytic-Heuristic Instrument Utilized in “The Minnesota Experiments” , 1978 .

[31]  G. C. Allen,et al.  Investment in Innovation , 1971 .

[32]  J. C. Henderson,et al.  The Influence of Decision Style on Decision Making Behavior , 1980 .

[33]  J. G. Carlson.  Recent assessments of the Myers-Briggs Type Indicator. , 1985, Journal of personality assessment.

[34]  Henry Mintzberg.  The Nature of Managerial Work , 1974, Operational Research Quarterly (1970-1977).

[35]  Peter Brownell,et al.  Participation in Budgeting, Locus of Control and Organizational Effectiveness: A Field Extension , 2015 .

[36]  Albert Pepitone,et al.  Lessons from the History of Social Psychology. , 1981 .

[37]  A. Tversky,et al.  The framing of decisions and the psychology of choice. , 1981, Science.

[38]  Kalman J. Cohen,et al.  Strategy: Formulation, Implementation, and Monitoring , 1973 .

[39]  Norman B. Macintosh,et al.  Social Software of Accounting and Information Systems , 1985 .

[40]  Miklos A. Vasarhelyi,et al.  Learning Patterns, Decision Approach, and Value of Information , 1972 .

[41]  Joseph L. Bower,et al.  Planning and Control: Bottom Up or Top Down? , 1974 .

[42]  Madhav V. Rajan,et al.  Cost Accounting: A Managerial Emphasis , 1972 .

[43]  Edward J. Conlon,et al.  The moderating effects of strategy, visibility, and involvement on allocation behavior: An extension of Staw's escalation paradigm. , 1980 .

[44]  Jan H. B. M. Huysmans,et al.  The Effectiveness of the Cognitive-Style Constraint in Implementing Operations Research Proposals , 1970 .

[45]  Barry L. Lewis,et al.  Human information processing research in accounting: The state of the art in 1982 , 1977 .

[46]  Henry Mintzberg,et al.  The Structure of "Unstructured" Decision Processes , 1976 .

[47]  E. Eugene Carter,et al.  PROJECT EVALUATIONS AND FIRM DECISIONS , 1971 .