Important cards Flashcards
What is mental accounting?
Mental accounting is the phenomenon that people mentally categorize amounts of money into different “mental accounts”, and attach different values and decision making rules to the same amount of money depending on the mental account to which it belongs.
What is the difference between descriptive and normative models?
Actual judgments and decisions can deviate from what is optimal, and descriptive models often explain such deviations, for example focusing on cognitive limitations or the social setting in which the judgment/decision is made.
What is an example of mental accounting for a manager who gained money unexpectedly?
He might spend this money on perks for himself and his employees that he had never purchased if the gain resulted from hard work. This is irrational because money is fungible, i.e. all money is the same independent of its origin or intended use.
What kind of things might someone be fooled by who believes their dog’s barking can predict the weather?
Might be ‘fooled by randomness’ and see / recognize patterns that do not exist.
Confirmation bias: tends to notice when dog is correct more frequently than dog is incorrect.
What are two behavioral factors that can influence a manager’s decision whether or not to overstate a cost estimate?
Personal norms and social preferences.
personal norms: personal norms of being honest, deviating will be painful for managers
Social preferences: genuinely care about the welfare of the owners.
What do managers cognitive limitations restrict?
Managers cognitive limitations restrict the amount of information they acquire and process?
What things can influence managers’ cognitive limitations to unintentionally bias their estimates of their unit’s costs upward?
Information that is more salient, more in line with their existing hopes or beliefs, or more strongly associated with emotions gets more attention and more weight.
What do Bazerman and Moore mean with bounded awareness?
Bounded awareness means that individuals, when making judgments or decisions, unintentionally rely on only a subset of all available information and often also fail to use this information optimally.
What is the availability heuristic?
It explain the tendency to view information that is readily available as more common, or more accurate than information that is not.
What is the difference between bounded awareness and availabilty?
Availabilty: general heuristic.
bounded awareness: more specific in examining the types of information that are more likely to be in our focus in specific judgments or decision making contexts.
What is the winner’s curse?
People who buy something often end up feeling that they paid too much for it. If the seller sold it for what the good is worth, why sell it?
particularly noticible for bidders in an auction.
Where do judgment and decision-making biases often emanate from?
Judgment and decision-making biases often emanate from the heuristics that we employ.
What is heuristic?
A heuristic is a simplifying decision making strategy that individuals, intendedly or unintendedly, employ.
What are heuristics a coping mechanism for?
Heuristics are a coping mechanism to deal with our complex and dynamic environment.
What is a bias?
A bias is a systematic deviation from a neutral or normative benchmark.
What are 3 biases that can impact an audit partner to decide whether more extensive substantive testing of a client’s purchasing transactions are requried
Confirmation heuristic
Availability heuristic
Representativeness heuristic
What is the conjunctive events bias?
We overstate conjunctive events and understate disjunctive events.
What is bounded ethicality?
The systematic and predictable psychological processes that lead people to engage in self-serving but unethically questionable behaviors.
Where does unethical behavior not come from?
Unethical behavior does not follow from a deliberate and careful decision in which we tradeoff the (moral) costs and benefits of actions
What are the 7 points how you can improve decision making?
- Decision-analysis tools
- Acquire expertise
- Debiasing
- Reason analogically
- Take an outsiders’ view
- Understand biases in others
- Nudge
What are implicit attitudes?
Evaluations that occur without conscious awareness towards something
What is loss contingency?
A situation where there’s a reasonable chance than an asset has lost value or that a liability has occured.
What is the result for the conjunctive event bias?
Joyce & Biddle 1981 (WK3)
Anchoring and adjustment in probabilistic inference in auditing
Conjunctive formulation –> higher chance
Disjunctive formulation –> lower chance.
Its about chance of auditor giving going concern statement.
What is the reason that RPI has an effect?
Hannan et al. 2012 (WK5)
Title: The effect of relative performance information on performance and effort allocation in a multitask environment
Social comparison process
What is the multiplication formula?
P(A&B) = P(A|B) * P(B)
What are 4 examples of important social norms?
- Norms for effort provision;
- Norms for risk taking;
- Norms about moral behavior;
- Norms for loyalty.
What are social norms?
Rules and standards that are understood by members of a group, and that guide or constrain social behaviors without the force of law.
