The effect of a decision aid on risk aversion in capital investment decisions

a r t i c l e i n f o In this study we examine whether a decision aid is an effective means of reducing risk aversion within a capital investment decision context, and under what conditions. Participating in the experiment were 78 working adults (mid management) with a mean age 30 and enrolled in a leading U.S. MBA program. We predict and find that a decision aid will be most effective among individuals intolerance of ambiguity and exhibiting high negative affect. Risk due to uncertainty or ambiguity is present to some extent in many, if not most, of life's important decisions; and, research shows that it consistently influences choice across a variety of decision contexts (Camerer and Weber 1992). Within business specifically, the outcomes of prospective capital investments are rarely known with certainty, and outcome ambiguity is the rule rather than the exception. 3 Further, uncertainty and ambiguity have been shown to negatively influence man-agers' resource allocation decisions (e. note that " risk aversion leads individuals to…select " safe " projects…(that) reduce firm welfare. " (p. 437). In this study, we examine the effectiveness of a decision aid to reduce risk aversion. 4 When rendering capital investment decisions, managers often are faced with multiple options from which to choose on behalf of the firm. The uncertainty and ambiguity inherent in capital investment decisions increase choice complexity and task difficulty which, in turn, influence deliberative processes and ultimate choice (Sawers, 2005). Prior research demonstrates that individuals have limited cognitive capacity and, as a consequence, they commonly rely on simplifying heuristics and/or affective reactions in complex decision environments (Forgas & George, 2001). Decision aids are often employed, both in practice and in research, as a means of guiding employee decision making in directions beneficial to the firm. Still, while organizations invest substantial resources in the development, implementation and utilization of decision aids, desired benefits are not always realized (Bonner, 2008, Carmona et al., 2011). A variety of individual and task variables can limit or enhance the effectiveness of decision aids (Bonner, 2008; Glover, Prawitt, & Spilker, 1997). If the underlying cause(s) of suboptimal decision making are not addressed by the aid then the decision aid will not yield benefits ; and development costs will be wasted. In decision contexts where outcome ambiguity may have higher salience to selected decision makers, increasing the amount of task structure and clarity through a …