1. GODFREY HODGSON HOLMES TARCA
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
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