The effect of overconfidence, engagement and risk attitude on project entrapment : theory and evidence

The research investigates the effect of overconfidence, engagement, and teamwork on project entrapment. The fundamental factors in the research include project entrapment (decision to continue or abandon a failing project), managerial overconfidence, engagement and team's coordination and conflicts. Little research has been conducted to analyse the combined effect of overconfidence and engagement on project entrapment, and there is lack of research on team's decision on project entrapment specifically. Therefore, my research adds to the literature by developing a game-theoretical model of an individual manager and a model of a team to analyse their project investment decisions. By solving from backward induction, I discover that the manager's choice on continuing or abandoning the project depends on the different level of overconfidence and engagement. The model also reveals ambiguous effects of overconfidence on firm's value. A lower level of overconfidence can destroy firm's value while higher level of overconfidence increases firm's value. I extend the model to a team's decision, in which I find a team with one overconfident manager and a rational manager may have conflicting decisions and souring relationship depending on the manager's level of overconfidence. I further implemented two real-effort experiments, one for an individual's decision and the other for a team's decision, to test the propositions in the theoretical models. The experiments demonstrate the analysis of effect of overconfidence, engagement, and teamwork in the model. The experiments also provide pilot support and bring a potential direction for future research. The significance of this research is that it provides both theoretical and empirical evidence on the effect of overconfidence, engagement on individual manager's decision and team's decision. I close the analyse by discussing future research directions and the possibility of applying my research in practice.