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Title: Blijven doorgaan met een investering die haar doelen niet haalt?
Authors: Warnar, FJ
Keywords: Alternative investment projects
Survey research
Financial Decision making
Escalation of Commitment
Behavioural Finance
Issue Date: 1-Nov-2016
Publisher: Open Universiteit Nederland
Abstract: Continue with an investment that does not achieve its goals? In the media there are a lot of stories about companies or the government that are continuing with failing projects with disastrous consequences, such as major loses or even bankruptcy. The Standard Finance (SF) says that financial decisions are taken rational on basis of value maximization. The Behavioural Finance (BF) is based on the decision-making principles of the SF but examines explicit men’s behaviour when taking investment decisions. The BF is trying to find explanations why people persist in a losing situation. From literature it appears that Escalation of Commitment (EoC) may occur and that this is partly due to behavioural factors. It is not yet clear what companies can do to prevent EoC. Having a serious alternative project instead of the current failing project can make sure that managers are looking at the current project more objectively. It could also prevent certain behavioural factors such as self-justification, sunk costs effect, overoptimism and the completion effect from happening. All recent research on the relation between having an alternative and EoC have been done through experiments with students. This research is done with managers that take these decisions in real life, this is adding to the scientific contribution on EoC. My research is done through a survey with managers from medium sized-companies from the Netherlands. The research can also be relevant for managers when they need to make decisions if they should stop or continue with a failing project. The central research question of my research is: Affects the explicit involvement in the decision making process of alternative investment projects, the decision of managers of medium-sized companies in the Netherlands to wrongly continue with failing projects? In this research a project has failed when it cannot longer meet the original expectations. This means that the project is no longer creating any value or that the project is exceeding the cost budget in such a way that continuing is no longer economically justified. EoC arises when people get trapped in a losing situation but continue to invest money and time in the project. 53% of the respondents in this research stated that the reason to continue with a failing project is because the expectations for the future are looking good, despite the current disappointing results. The regression analyses confirm this, there is a significant positive relation between overoptimism and EoC. Overoptimism can cause EoC, but it also shows that having an alternative project has a negative effect on this relationship. It also shows that having an alternative investment project in the decision making process has a negative impact on EoC. This research shows that when having an alternative investment project in the decision making process when dealing with a failing project, can help managers to make a decision to stop with the current failing project. The most important recommendations in this research are to find out what actions can help managers to stop a failing project in an earlier stage and the research should be done again with a larger group of managers or in various European countries.
Appears in Collections:MSc Management Science

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