Decision Sciences Journal
Volume 29, Number 4
Fall 1998
Fostering Risk Taking in Research and Development: The Importance
of a Project’s Terminal Value
Randolph H. Case
Operations and Strategic Management Department, Boston College,
Chestnut Hill, MA 02167-3808, caser@bc.edu
Scott Shane
Sloan School of Management, Massachusetts Institute of Technology,
50 Memorial Drive, Cambridge, MA 02142, sshane@mit.edu
ABSTRACT. Large firms face a conflict in managing a
portfolio of high-risk projects. When an ongoing project is thought
to have a low likelihood of success, project team members take
risks to improve its chances of success. However, upper-level
managers who allocate resources tend to withhold resources from
a project with a low likelihood of success in favor of others
in the portfolio that look more promising. Because this paucity
of resources influences project team members to avoid risk, the
total effect of success likelihood on risk taking is conflicted.
The influence on risk taking of a project’s terminal value—defined
as the value that remains in the firm in the event of project
failure—is unequivocally positive, because both senior management
resource allocation and project team risk-taking propensity are
encouraged by terminal value. Thus, firms can override the ambivalent
effect of likelihood of success on project decision making by
focusing attention on a project’s terminal value.
Subject Areas: Cognitive Decision Models, Framing,
Product Development, Project Management, Research and Development,
and Strategic Decision Making. |