An investigation of risk perception and risk propensity on the decision to continue a software development project

Many information system (IS) failures may result from the inadequate assessment of project risk. To help managers appraise project risk more accurately, IS researchers have developed a variety of risk assessment tools including checklists and surveys. Implicit in this line of research, however, is the assumption that the use of such devices will lead to more accurate risk perceptions that will, in turn, lead to more appropriate decisions regarding project initiation and continuation. Little is known, though, about the factors that influence risk perception or the interrelationships that exist among risk perception, risk propensity, and decisions about whether or not to continue a project. Without a better understanding of these relationships it is difficult to know whether the application of risk instruments will be an effective means for reducing the incidence of IS failure. This study presents the results of a laboratory experiment designed to: (1) examine the relative contribution of two factors that are believed to shape risk perception: probability that a loss will occur and the magnitude of the potential loss, and (2) explore the relative influence of risk perception and risk propensity on the decision of whether or not to continue a software development project. The results indicate that magnitude of potential loss is the more potent factor in shaping risk perception and that a significant relationship exists between risk perception and decision-making. The implications of these findings are discussed along with directions for future research. (C) 2000 Elsevier Science Inc. All rights reserved.