ACC80005 FINANCIAL ACCOUNTING THEORY Take-home Assessment Semester 1

QUESTION 3 (10 Marks)

Economic man is assumed to be rational and self-interested. He or she always carefully evaluates all the options before making any decision, and always with the object of maximizing his or her personal ‘utility’ or satisfaction. But cognitive psychologists have demonstrated that humans simply lack the neural processing power to make the carefully calculated decisions economists assume. People are not rational, they are intuitive. And altruism is often an important consideration in their decision-making. People can’t choose correctly between three options where the best option is not immediately apparent. Rather than carefully thinking through the pros and cons of every decision, people tend to rely on mental shortcuts (‘heuristics’) which often serve them well enough, but also lead them into systematic biases. People are often slow to learn from their mistakes. They are frequently capable of reacting differently to choices that are essentially the same, just because the choices have been ‘framed’ (packaged) differently. This means that, rather than being coldly rational, people’s decisions are often influenced by emotional considerations. (Source: Gittins, R (2004) ‘An economics fit for humans’ Ronald Henderson Oration, Melbourne http://www.rossgittins.com/2004/08/economics-fit-for-humans.html)

REQUIRED:
Assume that you a behavioral accounting researcher. How would you design an accounting study to investigate whether the claim made in the above extract that people’s decisions are often influenced by emotional considerations is relevant to retail investors? (Maximum word limit: 500 words) (10 marks)