Academic journal article Journal of Applied Management Accounting Research

Testing the Rational Decision-Making Model through an Outsourcing Task

Academic journal article Journal of Applied Management Accounting Research

Testing the Rational Decision-Making Model through an Outsourcing Task

Article excerpt

Abstract

Previous research on financial decision-making situations indicated that contextual aspects of financial information, such as framing, problem space and asset specificity influence the outcome. To assess the influence of these factors, an outsourcing task was used to survey the perceptions of accountants. The survey examined the effect of framing (positive/negative) with the inclusion of sunk and opportunity cost information across the decision task.

The respondents were also presented with information regarding asset specificity - the extent to which assets are inexorably tied to the specific project or outsourcing agreement. In making the decision to outsource, the sunk cost effect, framing and asset specificity were found to be significant factors in influencing the decision outcome.

The results however, were not fully consistent with the predictions of prospect theory in particular a reverse effect was found- in the negative frame, greater risk-avoidance was evident while in the positive frame, greater risk-taking was evident.

Keywords

Outsourcing Task

Decision Making Contexts

Framing Effects

Asset Specificity

Prospect Theory

Risk-Avoidance

Introduction

Outsourcing continues to have an important role in the business environment (Kremic, Tukel and Rom, 2006; Quinn, 2000). The decline in the global economy may have slowed the trend in outsourcing however, management continue to explore opportunities for outsourcing across a variety of alternative business operations (Park, Reddy and Sarkar, 2000). How management approach outsourcing decisions (McIvor, 2000; Vining and Globerman, 1999) can have an important influence on the success or failure of organisations.

According to the economic theory of rational decision making, individuals are considered to be rational actors who engage in the process of optimising expected utility by selecting the highest payoff from available alternatives (March, 1988a; Majone, 1989; Rich and Oh, 2000). The assumption that decisions should be rational is implicit in the neo-classical economic theory of the "economic man" or the "rational man" (von Neumann and Morgenstern, 1944; Marsden, 1984; Provan, 1989; Boland, 1998). Rational actors do not necessarily examine all possible alternatives but may merely search until they find a solution that meets a certain acceptable level (satisficing) (March and Simon, 1958). This behaviour suggests that individuals try to be rational, but are bound by cognitive limitations. Simon (1979) distinguished between purely economic rational behaviour and functional behaviour, which he referred to as "bounded rationality", which recognises the cognitive limitations. Bounded rationality assumes that information is essential in allowing individuals to compare alternatives (March and Simon, 1958).

According to March (1988b, 386), the main reason for using information in rational decision making is to reduce uncertainty in making a choice from among a number of alternative courses of action. In decision models that promote the maximization of the individual's utility function, a lack of information is perceived as the reason for seemingly "irrational" decisions (Cook and Levi, 1990). Elster (1983) concluded that if decision makers have insufficient information, rationality requires them to abstain from considering alternative courses of action. Tversky and Shafir (1992) provided support for existence of satisficing behaviour by demonstrating empirically that decision makers end their search for alternatives once they find one that provides a ready justification for the choice. The decision making literature has identified a number of anomalies that highlight the subjective nature of decision making. Factors, such as the sunk cost effect (Arkes and Blumer,1985) and escalation of commitment (Staw 1976, 1981; Mahring and Keil, 2008) have been shown to adversely influence decision making. …

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