Comments on "An ExperimentalInvestigation of Explanations forOutcome Effects on Appraisals of

Capital-Budgeting Decisions"

KARIMJAMAL University of Alberta

The paper by Brown and Solomon is an extension of a previous (1987) paperby the same authors. The 1987 paper examined the effect of outcome informa-tion on managerial evaluations in a capital budgeting setting. The majorresults of the 1987 paper were that outcome information affected the waydecisions were evaluated and the impact of outcome information was attenu-ated by (1) previous involvement of the evaluator in the decision-makingprocess and (2) the extent to which the manager being evaluated could beheld responsible for antidpating outcomes.

The primary objective of the current paper is to identify causes of outcomeeffects. The paper tests three competing explanations for outcome effects:cognitive reconstruction, self-enhancing motives, and escalation of commit-ment.

My comments are organized around two central issues:

1 TTie relevance to an accounting audience of the knowledge of the underly-ing causes of outcome effects.

2 The design of the experiment and testing of the three altemative explana-tions proposed by the authors.

Relevance of causes of outcome effectsThe authors are very ambitious in trying to connect an individual level judg-ment phenomenon with organizational issues such as performance evaluation,organizational learning mechanisms, and information system design.However, these organizational issues require a consideration of an interper-sonal context that includes variables such as long-run strategic behaviour,moral hazard, incentives, and the social structure in which judgment is takingplace. None of these variables has been incorporated in the current study andthus the authors do not have much leverage in addressing issues of perfor-mance evaluation or design of information systems.

Contemporary Accounting Research Vol. 10 No. 1 (Fall 1993) pp 113-117 "CAAA

114 K. Jamal

For an applied field such as accounting, an individual-level response ten-dency (or bias) such as an outcome (or hindsight) effect raises a questionregarding its relevance in an interpersonal context in which agents have incen-tives to make good dedsions. Let us explore the cause of outcome effects andthe role of incentives in an interpersonal environment in overcoming prob-lems associated with outcome effects.

Outcome (or hindsight) effects occur when subjects who are asked to makea judgment cannot directly recall their old (preoutcome) belief. If subjectscould directly recall their previous beliefs, there would be no outcome effect.Studies of the hindsight effect show that subjects are able to directly recalltheir original beliefs in situations in which the judgment is highly distinctive orof great personal significance or in which subjects have been given a reason toignore outcome information (e.g.. Hasher, Attig, and Alba 1981; Pennington,Rutter, McKenna, and Morley 1980). In these situations, subjects do notexhibit hindsight effects. Outcome effects therefore are dependent on therebeing some defect in the subject's recall of the original belief, either becausean adequate mental representation of that belief was not created in the firstplace (e.g., because the subject was not originally motivated to retain thebelief) or because the belief has been forgotten.

These results suggest that hindsight effects are unlikely to occur in situa-tions in which subjects have incentives to remember their original beliefs orcreate strong representations of them. Moreover, in situations in which sub-jects are likely to forget or distort their ori^nal beliefs, an effective decisionaid would be an extemal memory system that records preoutcome beliefs ofparticipants (such as an accounting system). The external memory systemcould then make preoutcome beliefs such as expected rates of IRR used in thecurrent study, available to decision evaluators after the outcome has occurred.(Of course, such an external memory may also contain distortions, whichcould refiect similar incentives to those causing poor memory creation or for-getting by individuals.)

A second form of memory aid available in an interpersonal context is thememory of other agents who are competing for scarce capital budgetingresources. Monitoring by agents within the firm who compete for scarceresources allows very limited possibility for any agents to forget their originalbeliefs. In the extreme case in which the original beliefs are recorded and pub-licly disseminated such as in creation of a budget or a vote in a legislature, theoriginal beliefs of an agent become part of the common knowledge of agentsin the organization. It is very difficult to forget such common knowledgebeliefs.

In an organization that has an accounting system that records preoutcomebeliefs and/or other agents who are competing for scarce resources, it is notlikely that agents have the option of not remembering their original beliefe.They may have various economic incentives for creating explanations or justi-fications for inconsistent results, but these economic forces are not captured inthe present study.

Discussion of "Outcome Effects on Appraisals" 115

Design of the experimentTTiree competing explanations for outcome effects are tested in the study: cog-nitive reconstruction, self-enhancing motives, and escalation of commitment.A review of the hindsight literature (e.g., Hawkins and Hastie 1990), however,suggests that there are several potential explanations for hindsight effects(though cognitive reconstmction appears to be the most common one). Also,there is some evidence that supports each explanation under some conditionsas well as evidence that sometimes more than one explanation is required.The important research issue is not to test for only one cause of outcomeeffects but to identify the conditions under which each cause applies and therelative contribution of each explanation when more than one is involved.

An attempt to contrast individual explanations as in the current studyraises a concern about the dependent variable. The dependent variable usedin this study is the difference between evaluations when no outcome feedbackwas provided (the baseline) and when either good or bad outcome feedbackwas provided. The scale used to measure the baseline condition varied from+10 to -10. For the "agree" condition the observed baseline mean was +7.83and the "disagree" baseline mean was -1.31 (Table 1). This raises a concemabout a possible end-of-scale problem because the scale creates a bias againstobserving an increase in ratings when the baseline is already very high. Thisbias in the scale thus raises doubt about the results of this study, which sup-port the cognitive reconstruction explanations, because the scale bias favoursthis explanation. The authors have made a credible effort to address this issuewith a detailed explanation provided in footnotes 15 and 17.

Test of alternative explanations cognitive reconstmctionThe cognitive reconstmction explanation is that subjects invest significant cog-nitive effort in developing and analyzing a course of action that they recom-mend (to an investment committee in the experiment) relative to other non-recommended courses of action (this definition sounds like the concept ofjustification used in accountability studies). They then retain a cognitive rep-resentation that can be used to reconstruct their recommendation at a laterdate. Courses of action not recommended may not be stored in memory in thefirst place or may be forgotten, as discussed earlier.

When the subject and the committee agree on an action, the subject is notaffected by the outcome because he or she is able to use his or her well-devel-oped cognitive representation of that course of action to reconstruct his or heroriginal beliefs. Outcome effects thus are more likely to occur when the com-mittee does not choose the action recommended by the subject. The subjecthas a weak cognitive representation of the action he or she did not recom-mend and is not able to reliably reconstmct his or her original beliefs. Thesubject's evaluation is thus influenced by knowledge of the outcome thatresulted from the committee's action.

The logic of this argument is clear, although it rests on an implicit assump-tion of novice behaviour whereby subjects do not come to the task equipped

116 K.Jamal

with a well-developed cognitive representation of a course of action. The cog-nitive representation created in the process of making a recommendation isthus strong for the recommended course of action and weak for a nonrecom-mended course(s) of action.

Self-enhancing motivesThe self-enhancing motive explanation is that subjects want to "look good" inan experiment and thus when provided with outcome knowledge will act as ifthey always knew what was going to occur. In the present study, when the sub-ject gets positive feedback, that is, the recommendation turns out to be thebest decision (ex post), the subject will act as if he or she "knew" the projectoutcome all along.

The authors run into a logical problem, however, when the subject getsnegative feedback: the recommendation tums out not to be the best decision(ex post). The subject has to justify why he or she recommended a poor courseof action. An interpersonal setting is now invoked by the authors and an argu-ment is made that the subject cannot engage in self-enhancing behaviourbecause other agents in the organization know the subject's previous beliefs.The subject's previous beliefs are now part of the common knowledge ofagents in the organization.

The authors selectively invoke an interpersonal (multiagent) setting whenit is convenient for them. As discussed earlier, the assumption of an interper-sonal context would invalidate the need for this experiment. I agree with theauthors that there would be no outcome effect in an interpersonal setting andno self-enhancing behaviour.

Escalation of commitmentThe escalation of commitment explanation is that when a subject receives neg-ative feedback, he or she is motivated to increase his or her commitment to acourse of action to justify the original dedsion. An escalation (outcome) effectwill be observed only when the subject receives negative feedback; there willbe no outcome effect when the subject receives positive feedback.

An important design issue for this explanation is the operationalization ofnegative feedback. In most escalation studies (e.g, Staw 1976), negative feed-back is provided by indicating that a bad outcome occurred when the subject'srecommended action was taken. In the current study, however, subjects didnot get a bad outcome. Subjects got an outcome that was below their expecta-tion, but it exceeded the company's minimum acceptable return (positiveNPV project). It is not clear how subjects frame a "gain" that is less than theamount of gain expected but that is not a loss either. It appears that the designwas not effective in operationalizing a negative outcome and thus provides avery weak test of the escalation of commitment explanation.

SummaryAn experiment was carried out to test for a cognitive versus motivational

Discussion of "Outcome Effects on Appraisals" 117

explanation for outcome effects even though the hindsight effects literaturesuggests that both have some explanatory power and the more importantquestion is to understand the conditions under which they are invoked andhow they interact with each other. There are also several methodological con-cerns. The end-of-scale bias favours the cognitive reconstmction explanation.In addition, the motivational responses (self-enhancing behaviour and escala-tion of commitment) were not operationalized well in the experiment. Thehypotheses about self-enhancing behaviour are confusing because the authorsintroduce a multiperson setting in the negative feedback condition only. Theescalation of commitment explanation was poorly operationalized becausesubjects did not receive negative feedback, which indicated that the course ofaction they had recommended had failed. The experiment does not provide agood test for a cognitive versus motivational explanation for outcome effects.

ReferencesBrown, C, and I. Solomon. Effects of Outcome Information on Evaluations of

Managerial Dedsions. The Accounting Review ( July 1987) 564-577.. An Experimental Investigation for Outcome Effects on Appraisals of Capital

Budgeting Dedsions. Contemporary Accotmting Research (FaU 1993), 83-111.Hasher, L., Attig, M.S. Attig, and J.W. Alba. I Knew It All Along: Or, Did I? Journal

of Verbal Leaming and Verbal Behaviour (1981), 20,86-96.Hawkins, S., and R. Hastie. Hindsight: Biased Judgments of Past Events after the

Outcomes Are Known. Psychological Bulletin (May 1990).Pennington, D.C., D.R. Rutter, K. McKenna, and I.E. Morley. Estimating the Outcome

of a Pregnancy Test: Women's Judgments in Foresight and Hindsight. BritishJoumal of Social and Clinical Psychology (1980), 19,317-324.

Staw, B. Knee Deep in the Big Muddy: A Study of Escalating Commitment to aChosen Course of Action. Organizational Behaviour and Human Performance.1976,27-44.