GODFREY

HODGSON
HOLMES
TARCA

CHAPTER 6 (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

3
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

The
The study
study of
of the
the behaviour
behaviour ofof
accountants
accountants or
or the
the behaviour
behaviour ofof
non-accountants
non-accountants as as they
they are
are
influenced
influenced by
by accounting
accounting functions
functions
and
and reports.
reports.
Hofstedt
Hofstedt&&Kinard
Kinard

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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
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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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