1. Lecture-13 Behavioural Research in Accounting
Topic 7
Lecture-13
Behavioural Research
in Accounting
Readings Reference :
Text chapter 13 Behavioural Research in Accounting; Accounting Theory; John Wiley and Sons; 6th edition, 2006; pp

2. Learning Outcome/Objectives
After studying this topic, the students should be able to:
Analyze the perspective and the nature of behavioral accounting research.
Apply understanding of the role of accounting information provided by studying behavior.
Evaluate the influence of accounting information on behavior and on decision processes.
Evaluate that organizations are complex environments and accounting disclosures are trade- offs between competing perspectives and interests.
Analyze Brunswik Lens model.
Evaluate and criticize the limitations of behavioral accounting research.

3. Behavioural Accounting Research : Introduction
Definitions---
The study of the behaviour of accountants or the behaviour of non-accountants as they are influenced by accounting functions and reports (Hostedt &Kinard)
Behavioral accounting research tests hypotheses regarding the implications of realistic assumptions about human rationality for economic decisions in accounting settings (Waller, 2002).
Behavioural Accounting Research introduce the field of behaviour accounting by describing some of the key questions it investigates and some of the main research tools used by researchers. Along the way we will indicate some of the important findings so for from this research , particularly in the area of financial accounting.The capital markets and agency theory schools of research , behavioural accounting also has its limitations

4. Behavioural Accounting Research : Definition & Scope
One such assumption is that decision-makers face cognitive limitations which prevent them from acting as if they maximize expected utility (Simon, 1982)
As thoroughly documented in the psychology literature, cognitive limitations can lead to systematic decision biases.
(Connolly, Arkes, and Hammond, 2000)
Drawing from psychology, behavioral accounting researchers normally test their hypotheses with experimental methods that emphasize internal validity, sometimes at the expense of external validity.
As in psychology, most behavioral accounting experiments examine the behavior of isolated subjects who respond to an exogenous choice or information set.

5. Behavioural Accounting Research : Definition & 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
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

6. Behavioural Accounting Research : Definition & Scope
Capital markets research and agency theory are both derived from the discipline of economics and dispense with people’s actual motivations by assuming that everyone is a rational wealth maximiser.
Behavioural accounting , on the other hand, is derived from other discipline such as psychology, sociology and organizational theory, and generally makes no assumptions about how people behave; rather, its objective is to discover why people behave as they do.
The major type of BRA has become known as human judgement theory(HJT) or human information processing (HIP) and encompasses the judgement and decision making of accountant and auditors and the influence of the output of this function on users ‘ judgements and decision making.

7. WHY IS BAR IMPORTANT?
The importance of behavioral accounting can be most simply described by considering two companies that are identical in every respect in terms of expenses, profits, and all other non-human variables.
The use of behavioral accounting methods, however, may indicate to the potential investor that one company's leaders tend to demonstrate better decision making and hold better values than the other company. In some cases, this accounting method can reveal a business's value in a way that goes far beyond the cost and expense numbers on paper.

8. WHY IS BAR IMPORTANT?
While behavioral accounting can reveal that a company's success occurred because of the excellent and well-informed decisions of the key decision makers, it may reveal instead that a company's success came about in spite of poor decision making. This transparency gives stakeholders and investors a much clearer view and understanding of the company they are choosing to support.
Researchers in behavioral accounting may, for instance, try to develop effective and useful methods to measure the value of a businessman to a business over time by taking into consideration each major decision he makes.

9. WHY IS BAR IMPORTANT?
BAR can provide valuable insights into the way different types of decision makers produce, process and react to particular items of accounting information and communication methods . i.e. by using ‘Brunswik Lens Model’
Improving decision making is important , of course, to both users of financial information( who want to avoid making bad decisions which leads to losses) and to prepares and auditors of financial information ( Who want to avoid being sued)

10. WHY IS BAR IMPORTANT?
BAR can help lead to training and knowledge that improves these skills, thus allowing employee to perform better in the workplace and improve your chances of obtaining work, gaining promotions and achieving better pay.
BAR can potentially provide useful information to accounting regulators such as the (AASB) . BAR can directly study specific accounting options and report to standard setters on which methods and disclosures improved users decisions.
The finding of BAR can also lead to efficiencies in the work practices of accountants and othe professionals.

11. Development of Behavioural Accounting Research
The term ‘BAR’ first appeared in the literature in 1967, but HJT research had its foundations in the psychology literature with the seminal work of Ward Edwards in 1954.
The application of the research to accounting and auditing can be dated to 1974 when Ashton published an experimental study of the internal control judgments made by auditors.
To some extent , the development of behavioural research in the area of financial accounting has been eclipsed by the dominance of contracting theory since the 1980s. Nevertheless, important insights into the link between accounting information and human behaviour have been forthcoming.
Ashton is credited with being the first accounting researcher to use this technique, followed closely by Libby who was the first to use it in a user-oriented context. Both research have continued to play a dominant role in the development of BAR.

12. Approaches to understand information processing
Model- Description of a person’s decision-making processes
Brunswik Lens Model- an analytical framework and the basis for most judgement studies involving prediction i.e. bankruptcy
Process Tracing – which is an attempt to build a decision tree representation of a person's judgements
Probabilistic Judgement – in which decision processes are representated as probability statements based on Baye’s theorem.
The basic objective of HJT research is to describe the way in which people use and process pieces of accounting ( and other) information in a particular decision-making context.

13. The Brunswik Lens Model
BLM has been used ( since the mid-1970s) as an analytical framework and the basis for most judgement studies involving prediction i.e. bankruptcy or evaluation ( e.g. of internal control).
BLM is a very powerful tool for helping us understand decision process in very specific situations
Researcher's use the lens model to investigate the relation ship between multiple cues or piece of information and decision, judgements or predictions, by looking for regularities in the responses to those cues ( e.g. financial ratios) which are probabilistically related to an event in order to reach a conclusion about that event ( e.g. likelihood of loan default/ non- default).

14. (most likely estimate of defalt/non-defalt)
The Brunswik Lens Model
Environment
$Event(default/non-defalt)
Judgement
(most likely estimate of defalt/non-defalt)
Profit
Operation
Cash Flow
Debit to
equity ratio
Current
Ratio
Etc.
Decision makers
Achievement
Diagrammatic representation of the lens model
8-14

15. The Brunswik Lens Model
A regression analysis is conducted using the bank officer response as the dependent variable and financial ratio and other data as the independent variables that are attempting to explain the officers judgements.

16. An overview of approaches to understanding information processing

17. The Brunswik Lens Model
In developing a specific version of the Brunswik lens model , subjects are asked to make judgements for a large number of cases which are based on the same set of cue.
They may be asked to assess whether several firms are likely to fail, given the firm's working capital, price-earnings, earning per share, quick, debt to equity and other ratios.
A linear model, describing the functional relationship between the cues(ratios) and responses(likelyhood to failure), is then constructed as a means of representing the way in which information is processed by individuals.

18. The Brunswik Lens Model Importance
Patterns of cue use evident in various tasks
Weight 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 task.
The circumstances under which an expert system and ‘model of human behaviour’ out perform human.
The stability( consistency) of human judgement 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 of decision tasks
Researchers are still trying to determine the entire decision model or the decision process used by various classes users.

19. To be continued…………….