Fostering risk taking in research and development: The importance of a project's terminal value

Large firms face a conflict in managing a portfolio of high-risk projects. When an ongoing project is thought to have a low likelihood of success, pro ject team members take risks to improve its chances of success. However, up per-level managers who allocate resources tend to withhold resources from a project with a low likelihood of success in favor of others in the portfol io that look more promising. Because this paucity of resources influences p roject team members to avoid risk, the total effect of success likelihood o n risk taking is conflicted. The influence on risk taking of a project's te rminal value-defined as the value that remains in the firm in the event of project failure-is unequivocally positive, because both senior management r esource allocation and project team risk-taking propensity are encouraged b y terminal value. Thus, firms can override the ambivalent effect of likelih ood of success on project decision making by focusing attention on a projec t's terminal value.