Behavioral Economics of Accounting: A Review of Archival Research on Individual Decision Makers*

This paper develops a unified framework to synthesize the growing stream of positive research on role individual decision makers in shaping observed accounting phenomena. line recognizes two central ideas behavioral economics. First, behavior depends not only economic incentives and accessible information but also preferences, abilities, experiences, other characteristics. Second, constraints that structure human interactions encompass both formal institutions (e.g., rules, laws, constitutions) informal norms, conventions, rituals). Our review covers broad set individuals who are interest research: managers, directors, audit partners, analysts, standard setters, politicians, judges, journalists, loan officers, financial advisors, investors. We aim understand systematic effects characteristics wide spectrum phenomena, including reporting, disclosure, tax planning, auditing, corporate social responsibility. highlight importance personal for an individual's own others' perceptions. mainly focuses archival provides some thoughts about opportunities empiricists going forward. also, when feasible, future field, survey, experimental research. A takeaway from our is individual-level factors significantly improve ability explain predict phenomena beyond firm-, industry-, market-level factors. Économie comportementale de la comptabilité : examen recherche archivistique sur les décideurs individuels La présente étude élabore un cadre unifié pour effectuer une synthèse des recherches positives plus en nombreuses le rôle que jouent façonner certains phénomènes comptables observés. Ce champ s'appuie deux idées centrales du domaine l'économie comportementale. D'abord, comportement individuel est tributaire non seulement incitatifs économiques et l'information accessible, mais également préférences, capacités, l'expérience d'autres caractéristiques individuelles. Ensuite, contraintes qui structurent humaines englobent formelles (p. ex., règles, lois informelles normes, rituels). Notre s'attarde à vaste éventail personnes présentent intérêt comptable, soit gestionnaires, directeurs, partenaires d'audit, analystes, normalisateurs, politiciens, juges, journalistes, responsables prêts, conseillers financiers investisseurs. Nous tentons comprendre effets systématiques individuelles comptables, notamment communication divulgation d'information financière, planification fiscale, l'audit responsabilité sociale entreprises. faisons ressortir l'importance lien avec particuliers, aussi perception autres. examen, principalement comptabilité, offre quelques réflexions occasions s'offrent aux empiristes s'intéressent documents d'archives. En outre, lorsque c'était possible, nous avons proposé possibilités d'études terrain, d'enquêtes expérimentale. Une principales se dégage notre facteurs améliorent considérablement capacité expliquer prédire au-delà l'échelle l'entreprise, secteur d'activité marché. An theory seeks cannot divorce study people. (Watts Zimmerman 1990, 147) fundamental objective 1986). Early capital markets takes numbers as equilibrium outcome does analyze forces shape this (Ball Brown 1968; Beaver 1968). Positive nexus contracts view firm (Jensen Meckling 1976) practices by deciphering various contracting parties 1978). approach studying has led discovery important empirical regularities (Holthausen Leftwich 1983; Lys 1984; Healy 1985) continues further understanding today (Kothari 2019). Traditional builds neoclassical determine demand supply Under framework, investors mitigate asymmetry agency conflicts, managers based cost-benefit analysis maximizes their utility. It commonly assumed all Homo economicus (i.e., being) will make same choice given situation optimizing, govern between makers. In review, we focus body Following Thaler (2016), use term “behavioral economics” broadly refer evidence-based economics views sapiens real economy rather than self-interested being with well-defined unbiased beliefs, infinite cognitive willpower) abstract economy.11 Simon (1987, 612) notes: “The phrase ‘behavioral economics’ appears be pleonasm. What ‘non-behavioral’ can contrast it? The answer question found specific assumptions made theory.” (2016, 1597) predicts “the eventually disappear lexicon” turn attention economicus. extends traditional ways. it information, expands include shaped traits influenced investor sentiment. Overall, work adopts “in which hypotheses observations behavior” represents “a practical enhancements lead better predictions (Thaler 2016, 1591–92). While been judgment making many years (Dyckman 1964; Ashton 1974; Libby 1975; Gibbins Swieringa 1995; al. 2002; Kachelmeier 2020), examining did take off until more recently (Bamber 2010; Dyreng Ge 2011). There four key elements constitute foundation recent accounting: (i) rational (Simon 1955; Tversky Kahneman 1979; 2000); (ii) upper echelons perspective organizations (Hambrick Mason 1984); (iii) fixed methodology (Bertrand Schoar 2003); (iv) data observable characteristics.22 large literature utilizes (Libby 1981; Bonner 2008). approaches gathering complementary enhance validity conclusions reached (Bloomfield 2016). availability allows us develop refutable advance what people do actual behavior) should optimal 1980). Behavioral deviations models (often referred biases) necessarily mean these behaviors “irrational”—it might well case existing fully descriptive 2015; Lo 2017). appear random unpredictable, there deviation patterns shared individuals, similar characteristics, or environment. vast explores between-individual within-individual variation using observables. finance essential development shows adopting help consumers small investors, sophisticated highly trained professionals competitive business environment (Malmendier 2018). aims summarize evidence without prescribing rule society. collective have normative implications once function specified 1977; Jensen 1983).33 For example, if government increase pension savings rates among private sector workers, findings Benartzi (2004) suggest mandate employers establish automatic enrollment scheme employees automatically enrolled unless they explicitly opt out). players flows economy. Panel Figure 1 presents classical developed Palepu (2001, 408). left side figure flow firms savers, directly indirectly through intermediaries. right depicts savers firms, B enriches individuals. Operating consist directors. Household Accounting regulators setters partners. Information intermediaries analysts journalists. Regulators politicians judges. Financial officers advisors. responsibility (CSR). discuss how gender, race/ethnicity, appearance, experiences) behavior, affect perceptions outputs.44 See Appendix description undertake review. whether trading asset prices because topic reviewed extensively (Hirshleifer Shiller Barberis Reviews investors' processing settings provided Hirshleifer Teoh (2009), Emett (2014), Lee So (2015), Blankespoor (2020). complement reviews discussing react senders' may relevant conveyed. interdisciplinary nature. To settings, need rely theories finance, psychology, biology, neuroscience, organizational management science, strategy, linguistics, sociology. addition, methods overcome intrinsic limitations surveys used measure unobservable constructs directly, experiments draw causal inferences construct proxies. Ideally, where treat dimension equal dimensions, especially situations limited labor market competition disciplining forces. Similar examines challenge identifying first-order context establishing causality. move forward, researchers insights disciplines utilize novel sets settings. disentangle precise mechanisms behind relations unravel complicated decision-making processes choices. expect navigating exercise developing plan. At time, recognize although certainly improved, at times limit examine effects. With pedagogical goal mind, written tool assist learning subject area referee report critique each paper. thorough discussion inevitably reflects tastes no means “optimal.” encourage read original papers related done others form perspectives.55 portions cover 2016; Plöckinger Bradshaw 2017; Lennox Wu 2018; Abernethy Wallis 2019; Moon 2021). references intend consolidate, integrate, expand upon drawing conceptual section 2. proceeds follows. 2, historical “managers matter” provide 3, schema organize manager (and director) literature. Researchers familiar interested perspectives jump 3.6.66 avoid detailed critiques its particular addressed subsequent common discussed great length 3.6. 4, follow 3 regarding 1. Again, first lay out learn then offer suggestions whole end 4.5). Finally, concluding remarks conjectures 5. section, Section 2.1 view. 2.2 outlines choice, 2.3 discusses institutions. 2.4 uses CSR example illustrate why whose preferences influence decisions. often assumes top executives matter outcomes (Kohler Christenson 1983). view, interchangeable inputs into production reporting functions, machines raw materials.77 extreme argument even different, none differences environmental severely amount discretion (Hannan Freeman 1977). Thus, decisions depend activity's marginal benefits costs level, choices regardless teams (TMTs). contrast, argues inside maximize utility Contracting allow over firm's party most informed internal operations performance (Holmström 1979). Managers act opportunistically expense parties. Ex ante efficient reduce ex post opportunistic causes deadweight costs, increasing competitiveness (Klein 1983).88 Dechow (1994) early that, average, accrual recognition convey manipulate earnings. Standard assume optimizing 1976). These generally attribute heterogeneity governance. Extensions impose style control. strategic embodies reflect values bases 1984). perspective, viewed ultimate choice. extend actors less fewer regulation standards compared prices. next outline sapiens, explains managerial outcomes. Classic elegant predicting However, hundreds find deviate systematically predicted classic (Kahneman 1982). replaces tries incorporating ecology) (Becker 1993; Akerlof Kranton 2010). craft story phenomenon wish identify range behaviors. designed replace theories.99 Rabin (2013, 618) describes “portable extensions models.” note three assumptions. and, result, engage imperfect maximization 1955). Bayesian beliefs. tend overweight experiences events easy remember (Tversky 1974). Third, exhibit nonstandard preferences. care changes wealth level 1979), pure self-interest (Rabin Fehr Schmidt 1999). any presumption consciousness (Friedman 1953).1010 Sen (1997) makes following analogy. uniformly principle least light conscious decision. observer, behaves does. conduct exhaustive searches possible select best. Herbert introduced “bounded rationality” describe account maker's limitations.1111 (1955, 99) bounded rationality kind compatible access computational capacities actually possessed organisms, man.” Models feature deliberation cost prevents (Smith Walker 1993). When introduced, balance benefit effort trade-off, turn, process known “satisficing,” perform accept satisfactory Although irrelevant under unbounded rationality, rationality. As (1986, S211) writes, premise knowledge power maker limited,” “we must distinguish world actor's reasoning it. That say, test empirically) generated subjective representation problem.” experience internalize beliefs.1212 Mullainathan Shafir (2013) examples mind-set produced scarcity. randomized controlled experiment, Drexler (2014) show rule-of-thumb training (that taught basic heuristics) was effective improving micro-entrepreneurs. Rajgopal (2021) notes heuristics prevalent valuation. beliefs rigorous information. uncertainty identifies several belief formation pattern. asked estimate risk heart attack general population, response recall attacks acquaintances. tendency probability event ease heuristic vein, occur during lifetime Nagel 2011, D'Acunto moderated salience recency. Events salient likely remembered. witness natural disasters first-hand assign higher news. remembered recency effect). distant past “imprinted” person's memory, formative periods such childhood beginning one's career (Marquis Tilcsik 2013). long-term impact early-career documented populations, economists (Oyer 2006), investment bankers 2008), (Schoar Zuo 2017), partners (He 2018), sell-side (Clement Law advisors (Law 2021a), mutual fund (Chen, Lasfer decisions, neurological foundations memory neuroscience alter functioning brain “synaptic tagging” (Frey Morris 1997).1313 technical details synaptic tagging, book Sajikumar (2015). Synaptic tagging enhanced emotional arousal (LaBar Cabeza 2006; Talarico 2004), offers explanation learned Ru pay COVID-19 respond proactive manner live country had Severe Acute Respiratory Syndrome (SARS) infections 2003. effect holds though SARS viral easily accessible. Research suggests generate different emotions people, consider generates negative people's responses (Laudenbach 2019, 2020). Expected defined obey von Neumann-Morgenstern axioms.1414 axioms expected completeness, transitivity, independence, continuity (see Mas-Colell 1995 details). Prospect illustration model 1991). prospect derive relative reference point absolute wealth. assumption idea dependent. translating exhibits kink origin. captures loss averse. becomes flatter farther point. diminishing sensitivity S-shaped function, convex below concave above Intuitively, risk-seeking domain losses, risk-averse gains.1515