Behavioural studies were at one time thought to be peripheral to the fields of accounting and finance. But that notion has been put to rest with scholars demonstrating that to more fully understand these disciplines in practice, one has to understand how people actually make decisions.
Charting the way forward are scholars like Professor Shujun Ding of the Telfer School. He investigated the application of the balanced scorecard (BSC), a tool widely used in performance evaluation. He showed that the complexity of the tool resulted in information overloading, which compromised decision quality. In particular, the BSC was vulnerable to mood congruency biases, which lead judgments to accord with moods. The research also showed that financial incentives modified those biases.
“My results were analogous to what happens when you are a bank loan officer or an institutional investor who has to make a decision about a loan or an investment,” explains Dr. Ding, who teaches courses in both management and financial accounting.
“There might be about 20 factors that should inform your decision, and it’s desirable to consider all of these factors. But in practice, decision makers without decision aids only consider 7-8 of them, at most. It’s a subjective evaluation; you may have to ignore other pieces of information, and you need signals to enable you to make a decision.”
Moods are important in this regard because they provide the underlying context for thought processes and behaviours, Dr. Ding says. Their effects have been observed in an increasing number of studies. Research in finance, for example, has shown that stock prices can be influenced by mood effects linked to a sunny day versus a rainy day, or a win or a loss on the soccer pitch.
Once bias has been identified, the researcher undertakes an even harder task: finding a way to correct it. Dr. Ding’s experiments showed that management control systems could eliminate BSC-related mood biases. In particular, adding financial incentives led to benchmark-consistent judgments when a less complicated BSC is designed.
This finding suggested a promising new research direction while confirming the importance of behaviours in the accounting field. “Previously we thought that economic theories were able to explain everything,” observes Dr. Ding. “Once you recognize that decisions makers are human beings, subject to influence from many factors, a richer study of fields such as finance, accounting, and corporate governance begins to take shape.”