Summary Judgement and Decision Making in Accounting

Inhoud
Judgment and Decision making in Accounting................................................................................................................2
Week 1: Introduction: Normative Decision Making.....................................................................................................2
Week 2: How We Attach Value to Things: the role of risk and uncertainty.................................................................6
Week 3: Bounded Awareness and Bounded Rationality pt. 1...................................................................................10
Week 4: Bounded Awareness and Bounded Rationality pt. 2...................................................................................12
Week 5: Social Norms and Social Preferences...........................................................................................................16
Week 6: Ethics in Judgment and Decision Making & Improving Decision Making Processes....................................19




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,Judgment and Decision making in Accounting


Week 1: Introduction: Normative Decision Making

Lecture 1

What are judgments?
The attachment of value to something (ex. estimates, evaluations, opinions).

What are decisions?
The choice between alternatives.

What are normative models used for?
To see how people should be making judgment and decisions.

What are descriptive models used for?
To see how people actually make judgment and decisions.

What are prescriptive models used for?
To give practical suggestions on designing judgment and decision-making processes based on normative and
descriptive models.

What are normative decisions based on?
On a rational process of decision making where we use all available information in an optimal way to maximize the
expected net outcome.

What are the steps of the rational decision making process?
1) Define the problem;
2) Identify the criteria;
3) Weigh the criteria;
4) Generate alternatives;
5) Rate each alternative on each criteria;
6) Compute the optimal decision.

What is the dual process theory?
The theory that our thinking is split up in System 1 (intuitive) and System 2 (rational) thinking.

What is meant with System 1 thinking?
Our intuitive system which is typically fast, automatic, effortless, implicit, and emotional.

What is meant with System 2 thinking?
Our reasoning that is slower, conscious, effortful, explicit, and logical.

Why is it difficult to make rational decisions?
Because System 2 relies on System 1 for input and System 1 cannot be switched off. System 2 may also not be
employed frequently enough.

What is meant with accessibility?
How easily something comes to mind (perceptions and intuitions come to mind effortlessly).

How does accessibility affect judgments and decisions?
Easily accessible perceptions from System 1 have a disproportionate weight on our judgments and decisions.
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, What are the determinants of accessibility?
- Perceptual salience;
- Surprisingness;
- Familiarity;
- When things are associated with emotion, potential losses, or are in line with our current ‘mindset’.

What is meant with perceptual salience?
The tendency to use noticeable or observable traits to make a judgment. We emphasize this noticeable or salient
information when making decisions.

What is meant with heuristics?
Simplifying strategies or rules of thumb that people rely on when making decisions. Instead of answering a difficult
question (using System 2), our first impulse is to find an easier accessible answer to a related question using System
1.

What are the four main types of heuristics?
- Availability heuristic;
- Representativeness heuristic;
- Confirmation heuristic;
- Affect heuristic;

What is meant with the availability heuristic?
That things that come to mind easier are judged to be more likely, frequent, probable etc.

What is meant with the representativeness heuristic?
That (probability) judgments are influenced by how typical something is for its ‘category’.

What is meant with the confirmation heuristic?
That judgments are influenced by what we expect. We interpret new information as confirming our existing beliefs.

What is meant with the affect heuristic?
That judgments are affected by our emotional state or mood.

What is meant with utility?
Utility is whatever is maximized (“good”; ”goodness”).

What do we need to do before we can compare utility?
We need to satisfy two assumptions: transitivity and connectedness.

What is meant with transitivity?
If A>B and B>C, then A>C.

What is meant with connectedness?
It is either the case that A>B, or that A<B, or than A=B. This means than we can compare A and B.

What is meant with the expected-utility theory (EUT)?
That individuals should choose the option with the highest expected utility.

What should we do in the expected-utility theory when there is uncertainty?
We should calculate which option has the highest expected utility.

How can we calculate the expected utility?
Expected utility = utility of outcome x probability of outcome.
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