Predictable irrationality in managerial accounting: Does knowledge overcome cognitive biases of undergraduate students?

Abstract

Managerial accounting teaches students to make rational decisions by evaluating sunk costs, incremental costs, and opportunity costs. The behavioral literature suggests that biases and heuristics overcome rational thinking. The authors explore whether learning cost concepts attenuates behavioral biases. They find a statistically significant proportion of students completing a managerial accounting course exhibit predictable irrationality in personal choices. By matching behavioral choices with final exam answers, the authors also find that learning rationality principles in accounting does not reduce predictably irrational choices in other settings. The study findings are robust across three key rational concepts. Overall, the authors cannot reject the hypothesis that behavioral choices are independent of knowledge of the underlying principle of rationality.

Keywords:

• Accounting
• economics
• managerial accounting
• behavioral bias
• rational choice

Notes

1 For consistency in this article, we use behavioral economics to describe the integration of behavioral biases with principles of economic rationality.

2 Kahneman (2015) built on prior research in cognitive biases and brain development to suggest that humans take mental processing shortcuts (thinking fast) unless they are either trained or conditioned to use slower thinking modes (thinking slow). Thinking fast is easy and consistent with primitive brain development to survive whereas thinking slow is calculating and learned. Pompian (2012) suggested that learning can provide a mitigation factor for cognitive biases but there is little empirical evidence to support this proposition.

3 Various versions of the sunk cost questions appear in the literature. Examples include Nofsinger (2014) and Dolan and Stevens (2013).

4 The behavioral questions are adapted from examples in Ariely (2008) and Pompian (2012).