Managerial Mental Accounting and Downstream Project Decisions.

This article focuses on how managerial mental accounting—incorporating behavioral biases such as loss aversion, reference point updating, and narrow framing—affects project leaders' decisions when revising project scope, cost, and completion time. It develops a behavioral model contrasting a rational project leader (PL) who optimally adjusts plans based on updated information with a behavioral project leader (BPL) who insufficiently adjusts due to anchoring on initial plans and loss aversion, leading to reduced financial profit and reluctance to abandon projects. The study finds that the choice of progress measures used to evaluate project status (planned value, actual cost, earned value) influences reference point updating and thus the extent of insufficient adjustments; notably, measuring progress via planned scope and actual cost mitigates these biases, whereas earned value for cost is never advisable. The authors suggest that project governance and management software can strategically select or highlight progress measures to nudge behavioral project leaders toward more rational revisions, improving project outcomes.