Recognizing that it may be in managers' best interests to be overly optimistic when proposing projects,how might firms effectively control this impulse?
A) Employ capital rationing
B) Require that all proposals be initiated from the lowest possible management level
C) Fire managers if any of their proposals fail to produce the expected results
D) Fund all project proposals

Question

Quizplus · Accepted Answer

Employing capital rationing allows firms to limit the amount of funds available for projects and prioritize which projects to fund. This can discourage managers from proposing overly optimistic projects that are unlikely to produce the desired returns. By forcing managers to be more selective about which projects to propose and ensuring that only the most promising projects are funded, firms can effectively control the impulse to be overly optimistic. Requiring that all proposals be initiated from the lowest possible management level and firing managers if their proposals fail would likely have negative consequences on morale and innovation within the organization, while funding all project proposals without regard for their potential returns would be financially unsustainable.

Recognizing That It May Be in Managers' Best Interests to Be