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GODFREYHODGSON
HOLMESTARCA
CHAPTER 13 BEHAVIOURAL RESEARCH IN
ACCOUNTING
Behavioural accounting research: definition and scope
• ‘Positive’ research encompasses– Capital markets research
• asks how do securities markets react to accounting information
– Agency theory research• asks what are the economic incentives that determine
the choice of accounting methods
– Behavioural accounting research• asks how do people actually use and process
accounting information
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Behavioural accounting research: definition and scope
• Capital markets research looks at the macro level of aggregate securities markets
• Agency and behavioural research both focus on the micro level of individual managers and firms
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Behavioural accounting research: definition and scope
• Capital markets and agency research are both based on economics and assume everyone is a rational wealth maximiser
• Behavioural research is based on psychology, sociology and organisational theory and generally makes no assumptions about how people behave
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Behavioural accounting research: definition and scope
Definition
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The study of the behaviour of accountants or the behaviour of
non-accountants as they are influenced by accounting functions
and reports. Hofstedt & Kinard
The study of the behaviour of accountants or the behaviour of
non-accountants as they are influenced by accounting functions
and reports. Hofstedt & Kinard
Behavioural accounting research: definition and scope
• The major type of BAR is – Human judgement theory (HJT) or– Human information processing (HIP)
• Looks at the judgement and decision making of accountants and auditors and the influence their output has on users’ judgements and decision making– aim is to explain and predict behaviour and
improve decision making6
Why is BAR important?
• It discovers how people use and process accounting information
• It provides valuable insights into the ways different types of decision makers produce, process and react to particular items of accounting information and communication methods
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Why is BAR important?
• It provides useful information to accounting regulators
• It leads to efficiencies in the work practices of accountants and other professionals
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Development of behavioural accounting research
• HJT research began in 1954• The term BAR appeared in 1967 • Last 30 years has seen an explosion in BAR
– especially auditing– importance of judgement– the ‘Brunswik lens model’
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An overview of approaches to understanding information processing
• Three major research approaches– Brunswik lens model
• the dominant approach
– process tracing• build representative decision trees
– probabilistic judgement• probability statements based on Bayes’s theorem
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The Brunswik lens model
• Used as an analytical framework and the basis for most judgement studies involving
– prediction (e.g. bankruptcy)
– evaluation (e.g. internal control)
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The Brunswik lens model
• Has provided valuable insights regarding– patterns of cue use evident in various tasks– weights that decision makers implicitly place on a variety
of information cues– the relative accuracy of decision makers of different
expertise levels in predicting and evaluating a variety of tasks
– the circumstances under which an expert system and/or ‘model of human behaviour’ outperforms humans
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The Brunswik lens model
• Valuable insights (continued)– the stability (consistency) of human judgment
over time– the degree of insight decision makers possess
regarding their pattern of use of data– the degree of consensus displayed in a variety of
group decision tasks
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The Brunswik lens model
• The model usually has good predictive powers– it removes much of the random error due to
human things such as tiredness, illness or distraction
• An important limitation is that it is not a good descriptor of how people actually make decisions– so process tracing methods developed
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Process tracing methods
• Provides an explanation about how a decision is made– ‘process tracing’ or ‘verbal protocol’– produces a ‘decision tree’ to represent the
decision process– ‘classification and regression trees’ (CART)
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Probabilistic judgement
• Useful where initial beliefs about a prediction or evaluation need to be revised as new data arrives
Posterior odds = Likelihood ratio x Prior odds
• Found use of rules of thumb to simplify complex judgment tasks
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Lens model studies – the evidence
• accuracy of humans’ predictions of business failure
• model of human behaviour
• information overload literature
• judgement confidence literature
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Process tracing studies – the evidence
• Brunswik lens models and process tracing style studies are different technologies with the same objective of modelling decision processes as completely as possible
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Format and presentation of financial statements
• Libby (1976) – 3 options for improved decision making– changing the presentation and amount of
information– educating decision makers– replacing decision makers with a model of
themselves or with an ideal cue-weighting model
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Format and presentation of financial statements
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Format and presentation of financial statements
• Little research has been undertaken regarding ideal presentation formats– e.g. graphs versus tables– e.g. colour versus black & white
• Mixed results• No well developed and tested theory
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Probabilistic judgement studies – the evidence
• Three rules of thumb (heuristics)– representativeness
– availability
– anchoring and adjustment
• Expert judgement and rules of thumb
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Probabilistic judgement studies – the evidence
Representativeness • When judging the probability that a particular
item comes from a particular population of items, people’s judgement will be determined by the extent to which the item is representative of the population
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Probabilistic judgement studies – the evidence
Availability• The assessment of the probability of an event
is based on the ease with which instances of that event come to mind
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Probabilistic judgement studies – the evidence
Anchoring and adjustment• An initially given response serves as an
anchor, and other information is used to adjust that response
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Accounting and behaviour
• The techniques adopted and the subsequent interpretation of reported information are matters of perspective
• Accounting is a direct function of human behaviour and activity
• Two-way influence
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Limitations of BAR
• Frequent contradictions between the findings of similar studies
• Human information processing is far more complex than the development of current research theories and methods
• Research settings fail to adequately replicate real-world settings
• Should policy be influenced by research on individual decision makers
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Limitations of BAR
• The major limitation is the lack of a single underlying theory to unify diverse research questions and findings– has borrowed from a multitude of disciplines and
contexts and so no common framework
• A single theory is unlikely in the foreseeable future
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Issues for auditors
• The process of auditing is often treated as a ‘black box’– what are the characteristics of better auditors– what are the factors that affect auditors’
judgement– research challenges in balancing realism and
simplicity in research design
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Summary
• If we are to have a better understanding about how people use accounting information, then we need to study peoples’ actual behaviours and decision processes
• BAR can be used to explain and predict behaviour and improve decision making
• Research in this area has relied heavily on the Brunswik lens model, process tracing methods and the probabilistic judgement model
• There are significant limitations in BAR
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Key terms and concepts• Behavioural accounting research (BAR)• Human judgement theory (HJT)• Human information processing (HIP)• Brunswik lens model• Process tracing methods• Classification and regression trees (CART)• Probabilistic judgement• Rules of thumb (heuristics)• Representativeness• Availability• Anchoring and adjustment
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