GODFREY HODGSON HOLMES TARCA

1. GODFREYHODGSONHOLMESTARCA CHAPTER 13 BEHAVIOURAL RESEARCH IN ACCOUNTING

2. 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

3. 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

4. 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

5. Behavioural accounting research: definition and scope Definition The study of the behaviour of accountants or the behaviour of non-accountants as they are influenced by accounting functions and reports. Hofstedt & Kinard

6. 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 making

7. 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

8. Why is BAR important? • It provides useful information to accounting regulators • It leads to efficiencies in the work practices of accountants and other professionals

9. 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’

10. 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

11. 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)

12. 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

13. 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

14. 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

15. 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)

16. 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

17. Lens model studies – the evidence • accuracy of humans’ predictions of business failure • model of human behaviour • information overload literature • judgement confidence literature

18. 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

19. 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

20. Format and presentation of financial statements

21. 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

22. Probabilistic judgement studies – the evidence • Three rules of thumb (heuristics) • representativeness • availability • anchoring and adjustment • Expert judgement and rules of thumb

23. 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

24. 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

25. 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

26. 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

27. 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

28. 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

29. 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

30. 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

31. 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