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Planning Technology Investments For High Payoffs: A Rational Expectations Approach To Gauging Potential And Realized Value In A Changing Environment

Listed author(s):
  • Yoris A. Au

    (University of Texas at San Antonio)

  • Kim Huat Goh

    (Nanyang Technological University)

  • Robert J. Kauffman

    (Arizona State University)

  • Frederick J. Riggins

    (University of Minnesota)

Registered author(s):

    The importance of distinguishing between potential and realized value for IT investments has been recognized by senior managers and IS researchers since some time in the 1980s, when it became apparent that not all IT investments were likely to achieve equivalent levels of return on investment. This chapter explores a new perspective with respect to potential and realized value, specifically noting the importance that rational expectations of IT strategic planners and investment managers play in conditioning decisionmaking by senior managers. The key insights that we offer are as follows: (1) Since organizational, operational and market contexts will tend to vary around different kinds of IT investments, it is only natural that such heterogeneity in outcomes should be reflected in the heterogeneous expectations of the managers who make the investments; (2) With this in mind, it should also be apparent that understanding heterogeneity in both potential and realized value should be a matter of arriving at an appropriate set of expectations, based on the acquisition of relevant updated information over time that will permit adaptive learning to occur on the part of senior managers; (3) No matter what the process is that enables managers to update their expectations (and achieve rational expectations in the process about their IT investments), the planning process that leads to new estimates of the payoffs from specific IT investments should be tuned for encouraging the tracking of a trajectory of values for potential value. This view is analogous to what an investor would do in tracking the value of stocks held in an investment portfolio, which are subject to value changes based on a variety of forces that are likely to affect the future cash flows of the firm and the present value of its growth opportunities. We develop this IT investment planning perspective in terms of the underlying theory and offer a number of new conceptual and methodological ideas that will enable managers to think their IT investment processes through with a more effective understanding of the rational expectations that are likely to be inherent in them.

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    File URL: http://business.utsa.edu/wps/IS/0014IS-296-2007.pdf
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    Paper provided by College of Business, University of Texas at San Antonio in its series Working Papers with number 0014.

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    Length: 39 pages
    Date of creation:
    Handle: RePEc:tsa:wpaper:0014
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    1. Sarv Devaraj & Rajiv Kohli, 2003. "Performance Impacts of Information Technology: Is Actual Usage the Missing Link?," Management Science, INFORMS, vol. 49(3), pages 273-289, March.
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    4. Sargent, Thomas J. & Wallace, Neil, 1976. "Rational expectations and the theory of economic policy," Journal of Monetary Economics, Elsevier, vol. 2(2), pages 169-183, April.
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    8. Rabik Ar Chatterjee & Jehoshua Eliashberg, 1990. "The Innovation Diffusion Process in a Heterogeneous Population: A Micromodeling Approach," Management Science, INFORMS, vol. 36(9), pages 1057-1079, September.
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    10. Margrabe, William, 1978. "The Value of an Option to Exchange One Asset for Another," Journal of Finance, American Finance Association, vol. 33(1), pages 177-186, March.
    11. Jeong-Yoo Kim, 1996. "Cheap Talk and Reputation in Repeated Pretrial Negotiation," RAND Journal of Economics, The RAND Corporation, vol. 27(4), pages 787-802, Winter.
    12. Jensen, Richard, 1988. "Information capacity and innovation adoption," International Journal of Industrial Organization, Elsevier, vol. 6(3), pages 335-350.
    13. Eduardo S. Schwartz & Carlos Zozaya-Gorostiza, 2003. "Investment Under Uncertainty in Information Technology: Acquisition and Development Projects," Management Science, INFORMS, vol. 49(1), pages 57-70, January.
    14. Bhattacharya, Sudipto & Chatterjee, Kalyan & Samuelson, Larry, 1986. "Sequential Research and the Adoption of Innovations," Oxford Economic Papers, Oxford University Press, vol. 38(0), pages 219-243, Suppl. No.
    15. Michael Spence, 1973. "Job Market Signaling," The Quarterly Journal of Economics, Oxford University Press, vol. 87(3), pages 355-374.
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