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Summary Judgment & Decision Making in Accounting

Course
- Judgment & Decision Making in Accounting
- Maas
- 2021 - 2022
- Universiteit van Amsterdam
- Accountancy and Control
154 Flashcards & Notes
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A snapshot of the summary - Judgment & Decision Making in Accounting

  • 1 Week 1 - Normative decision making

  • What are normative models?
    How people should be making judgments and decisions.
  • What are prescriptive models?
    Practical suggestions on designing judgment and decision-making processes based on normative and descriptive models.
  • System 1 and System 2 thinking has the central notion: accessibility. What is meant with that and what are the determinants of accessibility?
    - How easily something comes to mind.
    - Perceptions and intuitions come to mind effortlessly. 

    Determinants:
    - Perceptual salience    
    - Surprisingness
    - Familiarity
    - When things ...
    • are associated with emotion
    • are associated with potential losses
    • are in line with our current 'mindset' 
  • What does Baron (2004) state about normative models of decision making?
    • Any normative model needs to start from the simple idea that some outcomes are better than others. 
    • No claim about absolute truth, but 'truth relative to assumptions'
    • Normative models are through the 'imposition of an analytic scheme': The scheme is designed to fit the basic facts about who we are, but not necessarily to fit our intuitions.
  • What is the Bayes theorem?
    The theory provides a normative model for how we should update our beliefs (personal probabilities) in the presence of new information

    It tells us:
    P(A|B) - the probability of A given B 

    When we know:
    P(B|A) - the probability of B given A,
    P(A) - the probability of A,
    P(B) and the probability of B.
  • Give the normative decision making: summary
    • List all possible courses of action
    • Choose the one with the highest expected utility 
    • If new information becomes available: update your beliefs using Bayes' theorem and repeat...
  • 2 Week 2 - How we attach value to things: the role of risk and uncertainty

  • What is the Ellsberg paradox?
    This is a paradox of choice in which people's decisions produce inconsistencies with subjective expected utility theory.
  • How do we attach value according to risk aversion and ambiguity aversion?
    • Risk aversion: valuing a sure thing higher than a risky thing, even though the expected monetary value of the two is the same.
      • Prospect theory
      • The certainty effect = the tendency of people to feel disproportionately better about outcomes that are certain compared to outcomes that are probable or possible.
      • The possibility effect (think of the irrational decision to buy a lottery ticket): highly unlikely outcomes are given more weight than their probability justifies.
    • Ambiguity aversion: we are willing to pay less for a vague choice than for a clear choice.
      • The Elsberg paradox
    • Risk vs ambiguity: known vs unknown probabilities)
  • How do we attach value according to loss aversion?
    Loss aversion: losses weigh heavier than same size gains
    • The endowment effect: we attach higher value to thing than we own than to that we do not own.
      • Related phenomenon: the IKEA effect - we place disproportionate value on things that we created ourselves.
      • The Zero Price effect: the difference between no cost and very small cost has a disproportionate impact.
  • How do we attach value according to framing?
    Framing: presenting something as a gain or a loss. More generally, the term framing is often used to describe the way in which a choice is presented.
    • The Tom Sawyer effect: framing an unpleasant task as a privilege or unique opportunity.
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