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The evaluation of risky information technology investment decisions.

Article Excerpt
ABSTRACT: This research proposes that the risk preferences of decision evaluators and the decision "domain" systematically influence evaluations of decision makers' information technology (IT) investment decisions. Results of an experiment with 160 M.B.A. student participants indicate that risk-seeking evaluators rate IT investment decisions higher than do risk-averse evaluators. Further, decision evaluators are influenced by the gain and loss decision domains when evaluating a decision maker's risky information technology investment decisions. The findings indicate that providing decision domain information to decision evaluators leads to systematic differences in IT investment evaluations. A key contribution of this study is the discovery of the relevance of prospect theory to IT evaluation processes.

Keywords: decision; investment; prospect theory; risk.

Data Availability: Data are available from the first author.

I. INTRODUCTION

Managers and other decision makers must often take gambles in expensive and sometimes unproven technologies to survive in competitive marketplaces. The evaluation of information technology (IT) investment decisions is a critical component of the IT investment process that has been largely ignored in extant research. Organizations regularly evaluate decision performance, and evaluation represents a key organizational control feature (Brown and Solomon 1993). Performance evaluation processes encourage and reward decisions that are viewed favorably by the firm and punish and discourage decisions that are viewed unfavorably. As a result, the evaluation of IT investment decisions drives current and future investment decisions. It is important to investigate evaluations of IT investment decisions because most companies make IT investment decisions, the risks are high, evaluation processes drive future decision making, and firms must guard against biased evaluation processes.

Prior research (see, e.g., Tan and Lipe 1997; Hershey and Barton 1992, 1995) demonstrates that providing evaluators with pre-decision information (i.e., the information that was used by a decision maker to reach a decision) and information about the decision process can have beneficial effects on evaluations of decisions. When evaluators have access to predecision information and decision process information, they often consider how they would have made the decision, and base evaluations on their own interpretation of the predecision information (Brown and Solomon 1993; Hershey and Barron 1995; Tan and Lipe 1997). As a result of this tendency to evaluate decisions based upon personal preferences, we expect that evaluators' personal risk preferences and use of decision domain data will drive their evaluations of others' decisions.

This research extends theories of risk preference and prospect theory to evaluation processes in order to investigate the effects of outcome information, decision domains, and risk preferences on evaluations of investment decisions. Using M.B.A. students as participants, we find that evaluations of IT investment decisions are influenced by decision outcomes, dispositional risk preferences of evaluators, and the decision domains (gain versus loss) present during IT investment decision making.

The primary purpose of this research is to describe the evaluation processes used to evaluate risky IT investment decisions. This is among the first investigations of the joint effects of decision domains (i.e., gains and losses) and dispositional risk preferences on evaluations of risky decisions. This is also among the first studies to apply prospect theory to IT investment evaluation processes. The study has important implications for both theory and practice. This research contributes to theory in three ways. First, decision domain information currently may be available and can certainly be made available to evaluators of decision performance, and it is necessary to understand how this information influences evaluations before making critical control system choices. Second, prior researchers have not considered the possibility that the decision domain influences others' evaluations of IT investment decisions. Future experimental designs may need to control for the effects of decision domains on evaluation processes, and firms need to be aware of the influence of decision domains on evaluation processes. Third, understanding how evaluators' risk preferences affect their evaluations is essential to accurately describing the IT investment evaluation process.

Pragmatically, the evaluation processes for monitoring and controlling IT investment decisions may be ineffective if risk preferences and decision domains lead to inaccurate evaluations of investment decisions. Inaccurate evaluation processes may reward and encourage suboptimal IT investment decisions. Further, if evaluator characteristics or decision domains influence evaluation processes and promote non-utility-maximizing decisions, then performance evaluation processes will not serve their intended functions.

Overall, our results indicate that individual risk preferences and decision domains influence evaluations of risky investment decisions, such as IT investments. The primary findings from our experiment indicate that: (1) risk-seeking evaluators give higher evaluations to IT investment decisions than risk-averse evaluators; (2) risk-averse evaluators give higher evaluations to decision makers having unfavorable outcomes in gain domains than they give to decision makers having unfavorable outcomes in loss domains. (risk-seeking evaluators do not so differentiate) and (3) risk-seeking evaluators give higher evaluations to decision makers having favorable outcomes in loss domains than they give to decision makers having favorable outcomes in gain domains (but risk-averse evaluators do not so differentiate).

The remainder of the paper describes the relevant literature and hypothesis development, followed by a description of the design, methods, and results. The final section includes discussion and conclusions, as well as limitations.

II. LITERATURE REVIEW AND HYPOTHESES DEVELOPMENT

Information Technology Investment Decisions

Over $2 trillion was spent in the year 2000 on investments in information technology (IT) (World Information and Technology Services Alliance [WITSA] 2000). The changing nature of hardware/software requires constant upgrades and investments in new technologies, and the substantial cost of recurring IT investments indicates that poor IT investment decisions can end the life of a business (Hinton and Kaye 1996). As a result, control of IT investment decisions is critical to firm survival and success. Prior research also finds that most large-scale IT investments have a champion who is held personally responsible for decision outcomes, and the success or failure of an IT investment decision often determines a champion's career path (Hinton and Kaye 1996). Consequently, the quality of IT investment decisions influences the future of firms and their decision makers.

Managers recognize that IT investment decisions impose significant risk. Firms typically require traditional cost/benefit figures and discounted cash flow analysis more often for IT investments than any other investment decision, and IT investment decisions are evaluated against these measures (Violino 1998; Hinton and Kaye 1996; Willcocks and Lester 1991). Further, to compensate for the high risk of IT investments, firms often set rate-of-return hurdles arbitrarily high...

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