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Can neuroscience inform management accountants?

Can Neuroscience Inform Management Accountants? Yes it can!
Frank Hartmann, Conrado Bosman, Stephan Kramer,
Sergeja Slapničar and Dalla Via, N.
RSM Erasmus University Rotterdam, University of Amsterdam,
University of Ljubljana, Ca’ Foscari University of Venice.
It may sound incredible to management accountants, but we are on the brink of a revolution in
the science of economics and business. While economics and business are beginning to recognize the
advantages that neuroscientific evidence brings to understanding the behaviour of people in firms and
markets, our pilot study into the management accounting prospects of neuroscience to enrich and
validate its role in organizations indicates that its potential contribution to management accounting
knowledge could be huge. Management accountants typically seek to understand the way in which
humans process information to make decisions, estimate the future, and evaluate the past. In addition
they are increasingly aware of the effects that financial incentives have on information processing,
decision making, estimating and evaluating processes. Fortunately, the last decades display an
increasing interest of management accounting researchers and practitioners in psychological theory on
human cognition, motivation and decision making. As in the background, psychology is making swift
steps towards becoming a harder science, and economics and psychology seem to agree more and
more on such central concepts as ‘rational’ and ‘irrational decision making’, a whole field of social
theorists and practitioners is increasingly thrilled by the findings of neuroscientific enquiry. In this
paper, we develop the claim that extending the recent behavioral shift in orientation of management
accounting into the field neuroscientific enquiry may lead to new and applicable knowledge about the
role of management accounting and management accountants in organizations. We propose some
directions where this enquiry may lead us, and point to some caveats of doing and interpreting
management accounting studies in this domain.
Neuroscience is the field of science that investigates which brain regions are responsible for
specific functions of animals and humans, and how connections between brain regions affect
behaviour. While focusing on various functions in the field of physical movements, but also on
intangible functions such as memory and cognition, the part of neuroscience on human decision
making seems especially interesting for management accounting. A new discipline which investigates
these questions was born about a decade ago. Neuroeconomics, combining neuroscience, behavioural
economics and psychology, draws on techniques of imaging brain activity during an economic task to
explain the role that neural subsystems play in economic behaviour. Methodical advancements in this
field allow researchers to open up what has been considered a ‘black box’ thus far. While much
remains to discover, joint research efforts of economist, psychologists and neuroscientists have
resulted in discovery of brain areas that are activated for conscious decision making, coping with risk
and uncertainty, inter-temporal choice, reward and punishment. We will provide an overview of some
of the potential consequences for management accounting practice.
Neuroscientific research on human decision making has thus far led to the discovery of two
major decision-making areas in the brain. One is responsible for cognitive (i.e. rational) processes, and
a second one appears to be associated with the emotional aspects of decision-making. For management
accountants, as guardians of rational decision making in organizations, it is important to establish the
interplay between these systems. Not only does such knowledge allow a more fundamental
understanding of the origins of, and barriers to, ‘irrational’ decision making, but understanding how
emotions may dominate cognition has important consequences for the way in which we design and use
management accounting systems. It is therefore important to learn how the way in which we present
our ‘objective’ facts to support decision making may in fact lead to emotions, rather than cognitive
reaction. This, in turn, may explain why management accountants often have the feeling that their
reports function as ex post rationalization of decisions already taken, rather than ex ante decision
support material.
Managers are in most decisions confronted with the dilemma how much risk is acceptable to
take. Concerning risk taking, management control systems typically assume that people adhere to
some rational decision rules and that are able to estimate probabilities and values of future outcomes,
and. Already pre-neuro behavioural studies have shown that this is most often not the case. Moreover,
the way in which alternatives of a decision are presented to people affects their opinion about them
and thus their choice between them. Behavioural economics shows that if alternatives are framed as
gains, decision makers usually opt for safer options, thereby exhibiting risk averse behaviour, but they
reverse their choice when alternatives are framed as losses. Neuroscientific evidence on decision
making suggests that risk is associated with fear and anxiety, which hinder rational responses. For
management accountants, the question is what kind of presentation of information may reduce this
hidden fear and anxiety.
Risk is an important factor in human decision making, but not the only factor that introduces
complexity into the decision making process. An important task for management accountants is to
provide management with overviews of the inter-temporal consequences of managerial decisions. The
recent financial crisis has amply illustrated the need for more forward looking information. This has,
thus far, appeared to be almost impossible based on our current understanding of human behaviour.
People simply have such a strong preference for sooner rather than later (positive) outcomes, that it
appears to be hard to change that. On the other hand, people barely make a difference between two
outcomes that lie in the distant future. Neuroscientific research may provide a starting point in the
analysis and solution of this problem, as its results suggest that humans’ preference for short-term
outcomes is the consequence of the emotional system strong response to immediate rewards, rather
than to delayed rewards. This shows that the design of performance-related pay systems based on
delayed rewards may affect human behaviour in desirable ways by reducing the impact of emotions on
In the area of human motivation, new neuroscientific insights may also help management
accountants to go beyond the current debate on managerial motivation vis-à-vis rewards. By looking
how rewards are processed in the brain, and how they trigger action, neuroscientists have found
support for the so-called reinforcement learning model, which puts the incentive value of a reward at
the heart of the analysis, which means the difference between expected and actual reward. Another
source of motivation is from the hedonic experience of a reward. Currently the neuroeconomic
literature on motivation offers only fragmented evidence on the type of reward - brain activity
relationship, but management accountants would be, for example, interested to know how a claw-back
provision for bonuses would affect motivation both through a direct monetary incentive effect and a
loss of reputation effect.
Finally, people interact with other people in business decision making. Fairness, trust and
other social aspects of interactions not covered by standard economic frameworks are phenomena that
are addressed by neuroeconomics, and which are of great interest to management accountants.
Neuroscientific evidence shows that people reject unfair offers, even though this violates their best
economic interest. This suggests that emotional processes greatly interfere with cognitive decision-
making. In management accounting, given its rich practical and theoretical orientation, such issues are
find an easier place than in some other disciplines that have more singular approaches.
When applying neuroscientific methods for fundamental or applied research, management
accountants have to deal with at least four challenges. First, neuroscience requires a mastery of
observation techniques that are not the normal repertoire of social researchers. Rather than using
behavioural observations, available accounting data, or perceptual survey scales, observing brain
functions implies using brain imaging techniques that come in many forms, with associated strengths
and weaknesses. Techniques such as Electroencephalography (EEG, looking at electric activity at the
scalp level), or functional magnetic resonance imaging (fMRI, observing blood oxygen levels by
magnetic variation) require stylized and controlled settings to study human responses to stimuli. This
forces researchers and practitioners to consider research questions and designs that are more specific
than those often dominating management accounting research today. Second, given the technological
complexities of neuroscientific research, it is almost crucial to develop cooperation in
multidisciplinary teams consisting of neurologists, economists, psychologists besides management
accountants. This means that research projects will span individuals, and institutions, which will
change the current institutions in the research environments in which accounting research is
conducted. Third, neuroscientific research requires higher research funds to cover the labour and
technical costs of the laboratory, which greatly exceed the costs of traditional research in management
accounting using behavioural observations, available accounting data, or perceptual survey scales.
Finally, it has to be taken into account that the ability to directly observe brain activity does not lead to
straightforward implications for our field. From a purely neurological perspective, there is no such
thing as a ‘reward area’ or a ‘risk area’ in the brain that is being active, but it is rather our own
projection given the activity that we observe in certain areas in reaction to certain obvious ‘rewards’ or
certain ‘risk’.
But the potential pay-offs will be large if we are able to collaborate between neurologists and
management accounting researchers in not only observing, but also interpreting and understanding
brain activity. This not only requires theoretical sophistications, but is also likely to provide theoretical
progress itself. Management accounting is one of the most complex areas of business, as it aims to
solve a multitude of decision problems, balancing short-term and long-term objectives, under high
levels of environmental and task uncertainty, and involving various organizational participants that
have different interests and intentions. In this way, management accounting seems to be the area where
we can profit by learning the most fundamental drivers of human action in complex settings. We
believe it would be wrong to continue building our management accounting theories and practices on
increasingly sloppy grounds of traditional approaches to understanding human behaviour, when the
underlying disciplines of economics, psychology and even sociology are re-establishing the firm roots
of their paradigms.
... Management accountants are increasingly aware of the effects that financial incentives have on information processing, decision making, estimating and also evaluating processes. Even in management control systems, they typically assume that people adhere to some rational decision rules and are able to estimate the probabilities and values of future outcomes (Hartmann and Kramer, 2012). ...
... Management accounting is one of the most complex areas of business, as it aims to solve a multitude of decision problems, balancing short and long term objectives under high levels of environmental, task uncertainty and also involve various organizational participants that have different interests and intentions. In this way, management accounting seems to be the area where we can get profit by learning the most fundamental drivers of human action in complex settings (Hartmann and Kramer, 2012). Other aspect of brain behavior also parallel concepts from management accounting, such as forming expectations with budgets in budget setting and analysis of variances from budgets which are critical aspect of cost management in managerial accounting (Vatter 1950). ...
Full-text available
Managers are influenced in their decisions by the information provided by managerial accountants. Two typical examples from textbooks are the irrelevance of sunk costs and, more recently, the affect of knowing the outcome of a decision or revised budget forecast. Individual differences in the cognitive ability of decision makers to use information can lead to systematic differences in judgments. We identify and label one of these individual cognitive differences comprehensive thinking ability: the ability to think about multiple paths, branches or alternatives. Significant comprehensive thinking ability is likely to mitigate systematic differences in judgment in many contexts. We report the results of a series of studies using a variation on the investment trap (sunk cost or irrelevant cost) problem and a probability revision task. The findings suggest that comprehensive thinking ability may also explain other common systematic differences in judgment.
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