of 3 - Center for Global Outsourcings

a proportion of initial cash flows; . A small β indicates that managers rely more on their
own beliefs, and less on realized objective information when estimates are updated (HP2011).
This paper considers overestimation/ underestimation errors (equations 3 &4) over two periods:
5
( )( )
( )( )
( ) (( )
( ) (( )
Tenth Annual International Daejeon, South Korea P a g e | 41
Smart Sourcing Conference June 28-29, 2012
(
(
)
), (3)
)
), (4)
where denotes optimistic forecasting errors, and ,pessimistic errors.
(a). Optimistic
Forecasting Errors,
α=1.25
(e). Pessimistic
Forecasting Errors,
α=1.25
(b). Optimistic
Forecasting Errors,
α=1. 5
(f). Pessimistic
Forecasting Errors,
α=1. 5
(c). Optimistic
Forecasting Errors,
α=1.75
(g). Pessimistic
Forecasting Errors,
α=1.75
(d). Optimistic
Forecasting Errors, α=2
(h). Pessimistic
Forecasting Errors, α=2
Figure 1: Impact of Manager’s Anchoring and Loss of Technology On Off-shoring Decisions
When both β and | | are small, optimistic forecasting errors increases dramatically. If | | stays
large, managerial anchoring contributes less to the overall decision. If | | is small, managerial
anchoring effect dominates other effects dramatically, especially when α is small.
Decision Making By Committee (n decision makers)
( ) ( )( )
( )
( )( )
( ) ,
( ) ,
where is the magnitude of managerial anchoring effect for the decision maker ,
If all decision makers are overly optimistic, then the final estimation is given by:
.
∑
∑ ( ( ) ( )( )
( ) ) .
Similarly the final estimation for all decision makers being overly pessimistic is determined by
the following: ∑
∑ ( ( ) ( )( )
( ) ) .
5 Detailed derivations of all equations can be obtained on demand from the authors.