This paper extends prior research by jointly assessing the roles of risk attitude and tolerance for ambiguity in predicting choice. An experiment examined the effects of these variables on decisions made in four different scenarios. The four scenarios (treatment combinations) were generated by manipulating risk and ambiguity into two levels (high and low). The context was defined in terms of a sample size selection problem. The second issue explored was the effect of attitudes toward risk and ambiguity on decision confidence.The results indicate that (1) both risk attitude and ambiguity intolerance determined choice behavior, (2) the roles of these individual attitudes depend on the levels of the two treatment variables of risk and ambiguity, (3) the presence of ambiguity accentuates the perception of risk in individual subjects, and (4) decision makers who are less risk averse, and have more tolerance for ambiguity, display greater confidence in their choice. The paper discusses some of the managerial implications of the results.

Although recent research has identified attitudes towards ambiguity and risk to be important determinants of choice behavior [8] [18], no prior work jointly assessed the roles of both attitudes. We conducted a laboratory experiment using a real decision scenario and conducted exploratory analyses of the relationship between attitudes towards risk and ambiguity and the decision taken by the subjects. The results support the prediction that attitudes towards both risk and ambiguity affect choice behavior. Our exploratory analyses indicate interesting avenues for future research, including an examination of the decision process itself.

This study extends prior research on general Balanced Scorecard (BSC) evaluation tendencies (e.g., Lipe and Salterio 2000; Ittner et al. 2003; Banker et al. 2004) by documenting that patterns in BSC evaluations vary with a quality of the evaluator. Specifically, using data from an experimental performance assessment exercise, we find that evaluators' “ambiguity intolerance” (Budner 1962) influences their reaction to variation among performance measures within a BSC category. Further, we find that increased variation within a BSC category causes ambiguity-intolerant evaluators to give lower performance evaluation scores when the BSC category indicates relatively strong performance, but has no significant effect when the BSC category indicates relatively weak performance. These results are consistent with the argument that ambiguity-intolerant individuals are more likely to discount or ignore ambiguous information when the ambiguity relates to positive information. Our findings have significant practical implications regarding the accuracy and consistency of BSC evaluations.

Recently, a stream of theoretical development concerning the design of optimal compensation plans has emerged in the marketing literature. Little empirical work has been done so far to validate the theoretical predictions. The findings from the few field studies are equivocal and conflicting which we ascribe to failure to account for the major assumptions underlying the theoretical predictions. We argue that, in order to enhance the rigor of 'theory testing', the field studies must be complemented by laboratory experiments where the conditions stipulated by the assumptions of the theory can be systematically imposed and/or relaxed. This should help in the reconciliation of the differences found in the field studies. The experiment reported in this paper is a first step towards filling this void in the empirical research in this area. Here, we assess the impact of perceived environmental uncertainty and perceived agent effectiveness on the magnitude (total pay) and composition (salary-incentive mix) of employment compensation. The hypotheses stem from propositions analytically derived by Basu, Lal, Srinivasan, and Staelin (1985) and Lal and Srinivasan (1988). The insurance industry middle management compensation problem served as the experimental context. The results of the experiment ratified the hypothesis that an increase in perceived agent effectiveness leads to award of compensation contracts of larger total expected value and a larger proportion of performance-contingent pay. However, the hypothesis that an increase in perceived environmental uncertainty prompts the principal to award compensation contracts of smaller total expected value and a smaller proportion of performance-contingent pay was rejected. We discuss possible alternative explanations for the conflicting results associated with the uncertainty variable and identify future research opportunities in this area.compensation plans, agency theory, management incentive contracts, salary-incentive mix

This research note reports results of a laboratory experiment conducted as a follow-up investigation of an earlier study by Umanath, Ray and Campbell (Umanath, N. S., M. R. Ray, T. L. Campbell. 1993. The impact of perceived environmental uncertainty and perceived agent effectiveness on the composition of compensation contracts. Management Sci. (January) 32--45.). Here, we focus on a specific unexpected result of Umanath et al. who found evidence contradicting the theoretical prediction with respect to the impact of environmental uncertainty on the composition of compensation contracts. Umanath et al., in retrospect, offered an explanation for their unexpected finding based on an alternative theory under the same agency framework. Our results not only ratify the alternative explanation offered by Umanath et al., but also identify information symmetry/asymmetry as the contingent factor capable of reconciling the apparently contradicting predictions of the two agency-based theories used in this research.compensation plans, agency theory, incentive contracts, salary-incentive mix, information asymmetry