The effect of cognitive style and sponsorship bias on the treatment of opportunity costs in resource allocation decisions

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.