The impact of myopic loss aversion on continuing a troubled research and development expenditure

Abstract

Research and development (R&D) expenditure involve much risk and uncertainty. Failure of a research and development project is a common and dreaded question in innovation processes as a result of causing large losses to businesses. This study explored whether shortening evaluation periods could reduce the willingness of managers of research and development expenditure in continuing a troubled research and development project. The study employed 180 senior managers of high-tech companies as subjects of experimental test. The results indicate that continuing a risky investment decision is less likely in the context of a shorter evaluation period (myopic condition) because decision-makers will experience more frequent losses, leading to the tendency of decision-makers to avoid risk. The theory of ‘myopic loss aversion’ is useful in explaining this phenomenon.

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