Carla Marie F.

Primicias March 16, 2019

Accountancy 36 – A Strategic Finance Reporting

Title: When Managers Make Emotional Business Decisions

By: Anne Farrell, Ph.D.; Joshua Oon Soo Goh, Ph.D.; Ryan Kahle; Margaret Shackell, CPA, Ph.D.; Brian White, CPA, Ph.D.
Published: September 1, 2017

Important Notes:
 A great deal of research in accounting and management shows that manager’s decisions can be based on their fast
emotional responses to particular contexts.
 Questions to consider: How can the company cope if relying too heavily on emotions while making choices negatively
impacts a company’s performance? What can organizations do to encourage managers to think more slowly about how
their emotions affect their decisions? What can managers do to control their natural desires to work with people they like or
to let emotions rule?
 Thinking, Fast and Slow by Daniel Kahneman
 Environments can be structured to prompt decision makers to slow down and carefully consider all relevant information,
including emotions, using more-deliberative, analytical processing.
 Created a study on a workplace setting and research the impact of emotions on decision making and the strategies that can
lessen any possible negative economic consequences for firms.
 Variables:
1. economically optimal option - negative emotional reactions
2. economically suboptimal option - positive emotional reactions
3. manager had no emotional reactions to either colleague
4. Participants were compensated with either a fixed wage or performance-based pay
 First study used a homogenous group of graduate business students
second study used a more diverse group
 Results:
1. Fixed wage - economically optimal = 46% to 66% of the time while the economically suboptimal investment =
34% to 54% of the time.
2. Performance-based pay - economically optimal = 59% and 83%
3. No emotional reactions regardless of how they were paid - economically optimal - 95% 
 MRI Scanner to understand the decision making of the manager
 Managers have emotional reactions to colleagues - regions of the brain associated with emotional processing are
active during decision making; centers for more-automatic, less-effortful processing that’s often based on
emotional reactions. Managers receive performance-based pay, many of these brain regions associated with
automatic processing remain active, but there’s additional brain activity in associated with more-deliberative,
analytical processing.
 Performance-based pay motivates managers to make more economically optimal choices, and it does so by
changing the way emotional reactions are processed in their brains.
 Effects of Emotions:
 Evidence from brain activity confirmed that emotions are important drivers of decisions.
 Using performance-based pay is costly to companies, it leads managers to make more economically optimal
choices
 New understanding of the effects of something the company has control over—the design of pay plans—can
prompt similar processing changes and thus lead to greater economic benefits.