Mitigating the Mental Accounting Cognitive Bias through Instruction

Document Type : Original Article

Authors

• Mona Parsaei ¹
• Mahnaz Molanazari ²
• Bita Mashayekhi ³
• Farzane Jalalialiabadi ⁴

¹ Assistant Professor, Department of Accounting, Faculty of social sciences and economics, Alzahra University, Tehran, Iran

² Associate Professor, Department of Accounting, Faculty of social sciences and economics, Alzahra University, Tehran, Iran

³ Associate Professor, Department of Accounting, Faculty of Management, University of Tehran, Tehran, Iran

⁴ Assistant Professor, Department of Accounting and Data Analytics, La Trobe Business School, Latrobe University, Bundoora, Victoria, Australia

10.22067/ijaaf.2024.43891.1319

Abstract

This study explores the influence of instructional interventions in mitigating mental accounting bias during capital investment decisions. Initially, we investigate the potential costly errors resulting from mental accounting. Subsequently, we employ instructional strategies to reduce this cognitive bias. Employing an experimental methodology, we employ an 8x2 mixed factorial design to examine the impact of financing sources on mental accounting and the effectiveness of instructional interventions. The findings reveal that managers prone to mental accounting tend to retain debt-financed assets over equity-financed assets. Importantly, instruction proves effective in alleviating this cognitive bias. This research holds significance for both academic scholars and practitioners. It sheds light on the deficiency of instructional resources in accounting education for fostering essential professional judgment skills among students. It is recommended that Finance, Business, and Accounting faculties incorporate modules on mental accounting and related cognitive biases in postgraduate programs. Furthermore, manufacturing industries can benefit from employee training programs to reduce cognitive biases associated with mental accounting in capital budgeting.

Keywords

• Cognitive Bias
• Instruction
• Mental Accounting
• Investment Decision Behavior
• Judgment and Decision Making

Main Subjects

• Accounting

---

©2024 The author(s). This is an open access article distributed under Creative Commons Attribution 4.0 International License (CC BY 4.0)

References

1. Bakar, S., and Yi, A. N. C. (2016). The impact of psychological factors on investors’ decision making in Malaysian stock market: a case of Klang Valley and Pahang. Procedia Economics and Finance, 35(1), pp. 319-328. https://doi.org/10.1016/S2212-5671(16)00040-X
2. Banerjee, P., Chatterjee, P., Mishra, S., Mishra, A. (2019). Loss is a loss, why categorize it? Mental accounting across cultures. Journal of Consumer Behavior. 18(2). pp. 77-88.https://doi.org/10.1002/cb.1748
3. Bazerman, M.H., Moore, D.A. (2008), Judgment in Managerial Decision Making, 7th edition.New York: Wiley. New York
4. Beasley, M.S., Buckless, F.A., Glover, S.M., and Prawitt, D.F. (2014). Auditing Cases: An Interactive Learning Approach, Sixth Edition, Pearson. The U.S. 5. Bhattacharjee, S., Moreno, K. K., and Salbador, D. A. (2015). The impact of multiple tax returns on tax compliance behavior. Behavioral Research in Accounting, 27(1), pp. 99-119.https://doi.org/10.2308/bria-50976.
6. Bonner, S. E., Clor-Proell, S. M., and Koonce, L. (2014). Mental accounting and disaggregation based on the sign and relative magnitude of income statement items. The Accounting Review,89(6), pp. 2087-2114. https://doi.org/10.2308/accr-50838.
7. Bonner, S. (2008). Judgment and decision making in accounting. 1st edition. Pearson Prentice Hall.
8. Boylan, S J. (2008). A classroom Exercise on Unconscious Bias in Financial Reporting and Auditing. Issues in Accounting Education. 33(2), 229-245.https://doi.org/10.2308/iace.2008.23.2.229.
9. Bylinski, J H., Chow, C W. (1985). Human Judgment biases and the teaching of management accounting. Journal of Accounting Education. 3(1), pp. 167-172. https://doi.org/10.1016/0748-5751(89)90046-8.
10. Chandra, A., Kumar, R. (2012). Factors Influencing Indian Individual Investor Behavior: Survey Evidence. Decision, 39(3), pp. 141-167. http://dx.doi.org/10.2139/ssrn.2029642.
11. Chatterjee, S., Heath, T., and Min, J. (2009). The susceptibility of mental accounting principles to evaluation mode effects. Journal of Behavioral Decision Making. 22(2), pp. 120-137.https://doi.org/10.1002/bdm.616.
12. Cheema, A., and Soman, D. (2006). Malleable Mental Accounting: The Effect of Flexibility on the Justification of Attractive Spending and Consumption Decisions. Journal of Consumer Psychology. 16(1). pp. 33-44. https://doi.org/10.1207/s15327663jcp1601_6.
13. Cheng, F., and Wu, C., (2010). Debiasing the framing effect: The effect of warning and involvement. Decision Support Systems. 49 (3) , pp. 328–334. https://doi.org/10.1016/j.dss.2010.04.002.
14. Cheng, F., Wu, C., and Lin, H. (2014). Reducing the influence of framing on internet consumers’ decisions: The role of elaboration. Computers in Human Behavior. 37(8), pp. 56-63. https://doi.org/10.1016/j.chb.2014.04.015.
15. Cherono, I. (2020). Investor Behavior and Stock Market Reaction in Kenya. European Journal of Economic and Financial Research. 4(2). pp. 89-127. http://dx.doi.org/10.46827/ejefr.v4i2.856.
16. Christensen, L. B. (2007). Experimental Methodology, 10. Aufl., Boston ua, Pearson/Allyn & Bacon, Psychology.
17. Cloyd, C., and B. Spilker. 1999. The influence of client preferences on tax professionals’ search for judicial precedents, subsequent judgments, and recommendations. The Accounting Review, 74(3), pp. 299–322. https://doi.org/10.2308/accr.1999.74.3.299.
18. Cronbach, L. J. (1951). Coefficient alpha and the internal structure of tests. psychometrika, 16(3), pp. 297-334. https://doi.org/10.1007/BF02310555.
19. Du Toit, M.J. and Pienaar, A. (2005), A review of the capital budgeting behaviour of large South African firms, Meditari Accountancy Research, 13(1), pp. 19-27.https://doi.org/10.1108/10222529200500002.
20. Evans, J. S. B., Newstead, S. E., Allen, J. L., and Pollard, P. (1994). Debiasing by instruction: The case of belief bias, European Journal of Cognitive Psychology, 6(3), pp. 262-285.https://doi.org/10.1080/09541449408520148
21. Falsetta, D., Rupert, T. J., and Wright, A. M. (2013). The effect of the timing and direction of capital gain tax changes on investment in risky assets. The Accounting Review, 88(2), pp. 499-520. https://doi.org/10.2308/accr-50319.
22. Fay, R G., and Montague, N R. (2015). Witnessing Your Own Cognitive Bias: A Compendium of Classroom Exercises. Issues in Accounting Education, 30(1), pp. 13–34. https://doi.org/10.2308/iacze-50919.
23. Ferrara, W. (1966). Should investment and financing decisions be separated? Accounting Review. 41(1), pp. 106-114. https://www.jstor.org/stable/242528.
24. Glover, S. M., & Prawitt, D. F. (2012). Enhancing board oversight: Avoiding judgment traps and biases. Monograph Distributed by COSO.
25. Gredler, M. (2005). Learning and instruction: theory in to practice. Edition 5. Pearson.
26. Heath, C., and Fennema, M. (1996). Mental Depreciation and Marginal Decision Making. Organizational Behavior and Human Decision Processes. 68(2), pp. 95-108. https://doi.org/10.1006/obhd.1996.0092.
27. Jackson, S., Keune, T., and Salzsieder, L. (2013). Debt, Equity, and Capital Investment. Journal of Accounting and Economics, 56(s2–3), pp. 291–310. https://doi.org/10.1016/j.jacceco.2013.09.001.
28. Jackson, S. B., Rodgers, T. C., and Tuttle, B. (2010). The effect of depreciation method choice on asset selling prices. Accounting, Organizations and Society, 35(8), pp. 757-774. https://doi.org/10.1016/j.aos.2010.09.004.
29. Kahneman, D., and Tversky, A. (1979). Prospect Theory: An Analysis of Decision under Risk, In Handbook of the fundamentals of financial decision making: Part I, pp. 99-127. https://doi.org/10.1142/9789814417358_0006.
30. Kaustia, M., and Perttula, M. (2012). Overconfidence and debiasing in the financial industry. Review of Behavioral Finance, 4(1), pp. 46-62. https://doi.org/10.1108/19405971211261100
31. Koehler, D., and Harvey, N. (2004). Blackwell handbook of judgment and decision making. First edition. Blackwell Publishing Ltd.
32. Libby, R., Bloomfield, R., and Nelson, M. W. (2002). Experimental research in financial accounting. Accounting, Organizations and Society, 27(8), pp. 775-810. https://doi.org/10.1016/S0361-3682(01)00011-3.
33. Lipe, M. G. (1993). Analyzing the variance investigation decision: The effects of outcomes, mental accounting, and framing. The Accounting Review, 68(4), pp. 748-764. https://www.jstor.org/stable/248502.
34. Kengatharan, L., and Kengatharan, N. (2014). The Influence of Behavioral Factors in Making Investment Decisions and Performance: Study on Investors of Colombo Stock Exchange, Sri Lanka. Asian Journal of Finance & Accounting 6(1), pp. 1-23. doi:10.5296/ajfa.v6i1.4893.
35. Mnif, E., Salhi, B. and Jarboui, A. (2020), "Herding behaviour and Islamic market efficiency assessment: case of Dow Jones and Sukuk market", International Journal of Islamic and Middle Eastern Finance and Management, 13(1), pp. 24-41. https://doi.org/10.1108/IMEFM-10-2018-0354
36. Myers, A. (2013). Introduction to Statistics and SPSS in Psychology. Bournemouth University. Pearson.
37. Nofsingera, J. R., and Varmab, A. (2013). Availability, Recency and Sophistication in the Repurchasing Behavior of Retail Investors. Journal of Banking & Finance. 37(7), pp. 2572–2585. https://doi.org/10.1016/j.jbankfin.2013.02.023
38. Okada, E. (2001). Trade-ins, mental accounting, and product replacement decisions. Journal of RESEARCH ARTICLE 108
Mona Parsaei et al. IJAAF; Vol. 8 No. 1 Winter 2024, pp: 89-109 Consumer Research, 27, pp. 433-446. https://doi.org/10.1086/319619
39. Prelec, D., and Loewenstein, G. (1998). The red and the black: mental accounting of savings and debt. Marketing Science. 17(1). pp. 4-28. https://doi.org/10.1287/mksc.17.1.4
40. Ranzilla, S., Chevalier R. E., Herrmann G., Glover S. M., and Prawitt D. F. (2011). Elevating Professional Judgment in Auditing: The KPMG Professional Judgment Framework. New York, NY: KPMG LLP.
41. Sekaran, U., and Bougie, R. (2016). Research Methods for business: a skill building approach. 7th edition. John Wiley and Sons. The U.S.
42. Serfas, S. (2011). Cognitive biases in the capital investment context. In Cognitive biases in the capital investment context: Theoretical considerations and empirical experiments on violations of normative rationality, Wiesbaden: Gabler.
43. Shefrin, H. M., and Thaler, R. H .(1988). The behavioral life-cycle hypothesis. Economic Inquiry, 26(4), pp. 609-643. https://doi.org/10.1111/j.1465-7295.1988.tb01520.x
44. Thaler, R. (1980). Toward a positive theory of consumer choice. Journal of Economic Behavior and Organization, 1(1), pp. 39-60. https://doi.org/10.1016/0167-2681(80)90051-
45. Thaler, R. (1985). Mental Accounting and Consumer Choice, Marketing Science,)4)3, pp. 199-214. https://doi.org/10.1287/mksc.4.3.199.
46. Thaler, R. (1999). Mental accounting matters. Journal of Behavioral Decision Making. 12(3), pp. 183-206. https://doi.org/10.1002/(SICI)1099-0771(199909)12:3<183::AID-BDM318>3.0.CO;2-F
47. Turner, M.J. and Coote, L.V. (2017), "Discrete choice experiments: a research agenda for experimental accounting", Meditari Accountancy Research, 25(1), pp. 158-182. https://doi.org/10.1108/MEDAR-07-2016-0068
48. Tversky, A., and Kahneman, D. (1981). The framing of decisions and the psychology of choice. Science, 211, pp. 453-458. DOI: 10.1126/science.7455683
49. Yalcin, K.C., Tatoglu, E., and Zaim,S. (2016). Developing an instrument for measuring the effects of heuristics on investment decisions. Kybernetes, 45(7), pp. 1052-1071. https://doi.org/10.1108/K-05-2015-0130