Uluslararas Sosyal Ara trmalar Dergisi

The Journal of International Social Research

Cilt: 5 Say: 20

Volume: 5 Issue: 20

K 2012

Winter 2012

www.sosyalarastirmalar.com

Issn: 1307-9581

BEHAVIOUR OF INDIVIDUALS AND INSTITUTIONS IN RELATION TO FINANCE

AND ACCOUNTING
Seluk BALI*

Abstract
This study seeks to delve into the depths of the behaviour of individuals and
institutions in relation to finance and accounting and the end effects on markets
performance. It is based on a research that digs up informations on the history, models and
theories that sum up the whole concept. The research also seeks to determine the reliability
of assumptions and neo classical thoughts of experts. Main relationships explored include
consumers, market prices, attitudes and relationship between finance and accounting
among others. The main topics explored throughout the article include models and counter
criticisms. This article is thus geared towards shedding more light on these matters in the
hope that a better understanding of the addressed topics will result in an informed and
appropriate application of the same.
Key Words: Behavioural Finance, Behavioural Accounting, Bias.

1. Introduction to Behavioural Finance

This is a subject that involves the study of psychological influence on financial matters
and the end results on the markets. This behaviour is mostly quantified to practices by financial
practitioners and seeks to show the reasons why markets are inefficient. Social, cognitive and
emotional issues are utilized in understanding financial and economic decisions arrived at by
individuals and institutions. As a whole, these decisions give way to economic functions such
as consumers, borrowers and investors and the overall effect on market prices, resource
allocation and final returns on investment. Rationale boundaries such as selfishness and self
control are a major concern to analysts who consider public choice and integrate insights from
psychology and neo classical economic theory to try and sort out the puzzles (Sewell, 2007: 1-9).
The history of the studies related to this subject dates back to the forefathers of
economics such as Adam Smith who worked on the belief that price movements highly
depended on an individuals mental attitude. Theories such as The Theory of Moral
Sentiments (1759) sought psychological explanations of individual behaviour and
underpinnings of the utility.
However, with time, other concepts began creeping in and totally changed the whole
direction of the topic. This is indicated in the concept of dissonance which states that when two
*

Asist. Prof. Dr., Ordu Unversity, Vocational School, Department of Accounting and Tax.

- 305 subsequent notions tend to be inconsistent then ones mind begins to dissuade leading to a shift
in the persons belief. During neo-classical economics, experts reshaped the field to become a
natural science deducing and developing homo economicus as a concept leading to unforeseen
errors (Festinger, Riecken and Schachter, 1956: 3-32).
According to Pratt (1964: 122-136), other factors such as utility functions, risk aversion
and risks are considered a proportion of total assets. He goes ahead to state that experimentally
observed behaviour has limited application to market situations, noting that theories such as
prospect theory, are decision making models applicable to particular problems.
All in all, the main issue is to explain why market participants make systematic errors
which affect prices and returns, creating market inefficiencies. These inefficiencies include
under or overreaction to information which serve as causes to market trends as well as in cases
of bubbles and crashes. DeBondt and Thaler (1985: 793-805) opine that overreaction to past
information is a broad prediction of the behavioural decision theory put forward by Kahneman
and Tversky (Fama, 1998: 283-306).
Asymmetry between decisions to acquire or keep resources is another aspect of
behavioural finance. This scenario is known as bird in the bush paradox and loss aversion; the
unwillingness to let go of a valued possession. This explains why housing prices rarely decline
to market clearing levels.
1.1. The Relationship Between Finance and Behavioural Finance
Traditionally, people have been expected and assumed to behave in such a manner as
to maximize utilities, consequently leading to the expectation of individuals in financial circles
to be homo economicus as opposed to the typical homo sapiens. As such, the homo economicus
should make perfectly rational decisions, should exert unlimited processing power to any
available information, and should hold preferences well-described by standard expected utility
theory (Bloomfield, 2010). Statman (1999: 18-27) thus describes standard (traditional) finance as
the body of knowledge built on the pillars of the arbitrage pillars of Miller and Modigliani, the
portfolio principles of Markowitz ,the capital asset pricing theory of Sharpe, Lintner and Black
and the option-pricing theory of Black, Scholes and Merton Nevertheless, behavioural science
does not recognize homo economicus as an accurate depiction of real-life people and targets to
present a more accurate man in characteristic economic settings.
Bloomfield (2010) proposes a three-dimensional model to illustrate the resemblances
and dissimilarities between traditional finance and behavioural finance. This model has three
dimensions namely the institution being studied, the theory from which hypotheses are
described, and the methods used to demonstrate results.
The main connection between finance and behavioural finance centers on issues that
include investment, indicators and escalation among others. There exist several psychological
traps that can dupe investment analysts who might give disproportionate weight to the first
information received about a subject. This is escalated by status quo bias which makes recent
observations in forecasts, overconfidence in forecasts and confirming evidence.
Sentimental indicators help relate finance to finance behaviour by monitoring the
activity of market participants such as floor traders, insiders, mutual fund managers among
other sub factors. This is evident by the fact that some investors tend to consider future events
based on previous events. The importance of this scenario is that it identifies major turning
points in the markets.
Escalation bias occurs where investors put in more money in loosing investments rather
than ongoing successful investment due to averaging down when reducing the price on single
projects. Conventionally, traditional finance models would expect investors to re-evaluate
holdings negatively and consider exiting and taking their losses.

- 306 Stocks priced at low multiple book values tend to perform better result from risk factor
not captured by beta. This is known as value premium which is attributed to risk factors.
Researches on behavioural finance indicate that markets are not fully efficient due to
short term momentum and long term reversals in pricing. This phenomenon is best described
by long term return reversals propagated by overreaction and taxes.
Behavioural finance also has an effect on investing in what is termed as affect in a
behavioural asset pricing model. Affect can be termed as the impulsive sensations investors
show towards a particular company, which in other terms is referred to as ones gut feeling.
These gut feelings have often played a vital role in the valuation of investments as well as the
pricing of assets. Interestingly, experiments have demonstrated that subjective risk is
concomitant to negative affect which commonly manifests as a high perceived risk and high
returns, which is also frequently the case where objective high risk factors such as the ones in
Fama-French 3 Factor Model or the CAPM risk often lead to higher returns.
A branch of behavioural finance known as prospect theory delves into the matters
pertaining to why the utility of investors depends on deviations from moving points and not
real wealth. This is well-illustrated by investors holding on declined stocks for too long, and
then selling them very quickly when their prices go up.
Studies indicate that semi-strong form of the efficient market hypothesis holding leads
to investors not earning excess risk adjusted returns. Prediction of returns has not succeeded in
predicting short term returns. On the flipside, however, they have been relatively successful
with long term returns. Higher long returns for stocks can well be predicted using high
dividend yields, high default spreads and high term structure spreads.
Earlier theories have created an assumption that investors tend to act rationally so as to
maximize profits. Investor characters that appropriately explain the case include practitioners
identifying opportunities to profit from exploiting biases of other investors. However, security
market information should have no relationship with future returns if weak form of efficient
market hypothesis holds.
1.2. Basic Concepts of Behavioural Finance
This section seeks to explore key concepts that lead and guide in this field of finance.
Some of the concepts may seem improbable or lacking logic but have generally been observed
to be fairly prevalent in certain financial situations.
1.2.1. Anchoring
Anchoring is one of the major concepts that tend to attach an individuals line of
thought to a reference point especially when people are dealing with new concepts. It is the
decision making process where quantitative assessments are required and where these
assessments may be influenced by suggestions (Johnsson, Lindblom and Platan, 2002). It occurs
where individuals hold on to certain reference point or anchors but on reception of new
information shift the previous reference inadequately. Investors may refer to irrelevant figures
and statistics in anchoring incidents because of a lack of established economic theories to help
them establish values in inherently ambiguous markets. Historical prices, the most recent prices
or price changes of other stocks may also be used as anchors. Shiller (1998) noted that with the
increase in the ambiguity of the value of an item, there also came about a rise in the importance
of suggestions and the more the likelihood of adoption of anchoring as the means of
determining the price of the said item.
1.2.2. Mental Accounting
The second concept is mental accounting is that can be defined as the way people
categorize their money for separate accounts based on factors such as source of money and
intended purpose of the money. An illustration of mental accounting is a situation where an

- 307 individual has sets aside money for his childrens college fund or a new house. It would be
very difficult for such a person to spend that money as it is a very important account to him.
Shiller (1998) describes mental accounting as the tendency of people to place certain events into
certain mental accounts according to superficial attributes. Apart from mental accounts being
able to be separated with respect to time, they can also be isolated according to their content
(Goldberg and von Nitsch, 2001: 31-84).
Mental accounting may also manifest in the form of consistent investment in nonprofitable enterprises in the belief that one will recoup the money pumped into the investments.
Additionally, this phenomenon may be employed as a means of moderating struggles
pertaining to self-control. In such situations an individual may set-up distinct accounts that are
inaccessible to their uncontrollable compulsions (Shefrin and Thaler, 1988: 609-643). One way of
overcoming mental accounting issues is by understanding that regardless of the source, all
money is the same.
1.2.3. Confirmation and Hindsight Bias
The common belief of seeing is believing as used by many is not a true representation
of reality. This concept is known as confirmation and hindsight bias. People tend to have
preconceived opinions on others or events on first encounter hence, selectively filtering
information and paying more attention to information that supports their opinions. This is
exactly what happens in investing where an investor will be more comfortable with information
that supports original thoughts about an investment as opposed to different information.
Another side of it is that an investor will think the outcome of an event was obviously
predictable while this is not true. Therefore, to overcome this notion, one needs to find voice of
reason in a second opinion.
1.2.4. Gamblers Fallacy
Incorrect assumptions and predictions of events led to by probability and lack of
understanding is what is termed as the gamblers fallacy. One has a line of thinking that points
to an event likely happening following a series of events. This is totally wrong and ill advised
especially in investing where for instance one thinks that since stocks have gone up
consecutively, they will not go up again. When investing, investors ought to base their decisions
on fundamental and or technical analysis but not on pre existing events.
1.2.5. Herd Behaviour
It is a form of heuristics- a situation where individuals use practical efforts and
experience, trial and error, to come up with rules of thumb (Shefrin, 2000). This concept
emphasizes the fact that people tend to copy or ape actions of a larger group due to social
pleasure of conformity. This is because everyone will want to be a member of a group and to
gain entry they have to follow the group. Therefore, many will want to believe that such a large
group cannot be wrong. Shiller (2000) supports this, noting that people have learnt that when a
large group of people is unanimous in its judgments they are certainly right. Though often
appearing to an individual as being a rational decision, even with the knowledge that others are
similarly behaving in a herd like manner, such heuristic activities often lead to instabilities in
markets in addition to fuelling irrational group activities. This was seen in the early 1990s
when many investors put their money in internet related ventures. To avoid falling prey to such
temptation, an individual needs to research thoroughly and keep in mind that one persons
success cannot predict another persons success.
1.2.6. Overconfidence
Having an overly optimistic assessment of ones ability to perform above a certain level
on a particular project has often costed many people both their time as well as their assets.
Overconfidence remains a key finding in the understanding of the psychology of judgment
needed to judge market anomalies (Johnsson, Lindblom and Platan, 2002). The greater the

- 308 confidence an individual has in himself, the higher the risk of overconfidence that especially
manifests in areas one is not well informed bearing in mind that self-confidence typically bears
no relation to an individuals actual knowledge (Goldberg and von Nitsch, 2001: 31-84). Odean
(1998: 1775-1798) observes that overconfident traders perform many trades, believe they are
better than others and in the end get lower yields on investment. Overconfidence may also
result in a scenario where an individual observes a pattern in actually random data and
proceeds to make decisions or investments based on this false observation. It is therefore
advisable to acknowledge each set of challenges associated with each investment and try to
constantly refine investment techniques.
1.2.7. Overreaction and Availability Bias
There is a common belief that good news tends to raise securities on the stock market.
Thaler (1985: 199-214) showed that people tended to overreact to dramatic and unexpected
news occurrences. As such, the portfolios of prior losers are often seen to outperform those of
prior winners, consistent with the overreaction hypothesis (Johnsson, Lindblom and Platan,
2002). In a study conducted on the New York Stock Exchange, the best performing and worst
performing stocks were monitored for three year period. It was noted that the best stock
underperformed while the worst stock performed relatively above the index due to
overreaction to good and bad news respectively.
Availability bias makes people center on recent information making new opinion
biased to latest news. To overcome this, it is advisable to do a thorough research and
understand the true significance of recent news.
1.2.8. Prospect Theory
This theory can be described as a mathematically expressed alternative to the expected
utility maximization theory. In the expected utility maximization theory, the investors are not
averse to risks thus offering with certainty a representation of truly rational behaviour
(Johnsson, Lindblom, Platan, 2002). Kahneman and Tversky (1979: 263-292) put forward an idea
that people value gains and losses differently hence base their decisions on perceived gains
perceived. This can be well explained in a situation where gaining X is better than gaining 2X
and losing X to remain with a single X equal to the initial X. This line of thought creates an
asymmetric value function. This theory proposed the certainty effect where investors
behaved in such a manner as to show their belief in the impossibility of extremely improbable
events happening, and extremely probable events as being likely to happen (Johnsson,
Lindblom and Platan, 2002). The prospect theory was also based on value function. This value
function fundamentally differed from the utility function in that it had a reference point
determined by the subjective impression of each person.
1.3. Factors That Affect Behavioural Aspect of Finance
There exist several factors that affect behavioural finance, in most cases these factors
being closely intertwined or linked to the key concepts of behavioural finance. Psychological
and emotional factors fall under the category of the main influencers of the choices that are
made by an investor. Intelligence is most commonly overruled by emotions in main decision
making. On the other hand, most people tend to fear regret and hence many will make every
effort to try and avoid anything that can cause regret. If an investor detects the potential of
regret in an investment (for instance having a close friend who gambled in an investment that
did not pay off), it is likely that the individual will be deterred from such a venture.
One of the key factors that affect behavioural finance is overconfidence. When an a
person is too confident in himself it often leads to a higher portfolio turnover and lower returns,
it may also result in conservatism or hesitation of investors acting on new information.
Additionally, overconfidence could inspire one to persevere (believing things will ameliorate), a
person may also ignore new information and it may also lead to loss aversion or propensity of
people to hang onto losing stocks longer.

- 309 Misinformation and thinking errors also have the capacity to affect behavioural finance.
Illustrations of such effects are seen in forecasting errors; individuals overlooking small
samples, a lack of the diligence required in ones engagements and contracted framing. In some
cases misinformation may result in a person evaluation very few factors before venturing into
an investment, misinformation may also lead to biased information gathering in addition to
mental accounting.
The financial models used in money management and asset valuation may also affect
behavioural finance. These models integrate several key parameters with diverse effects on the
behaviour of individuals. Thalers model of price reactions to information; with two phases
namely overreaction and under reaction creates a price trend where either side depends on
good or bad news respectively. Empirical research corroborates this with Barberis, Shleifer and
Vishny (1998: 307-343) uncovering both underreaction of stock prices to news such as earnings
announcements and overreaction of stock prices to a series of good and bad news. Stock image
coefficient also has the capacity to influence the discipline of behavioural finance.
1.4. Basic Assumptions and Models of Behavioural Finance
There are two major assumptions that are made in the field of behavioural finance.
First, is that those investors will act in unbiased fashions to maximize the value of their
portfolios. In this case, it is stated that investors are rational expectants of wealth maximization
henceforth forming impartial expectations of the future. Consequently, they will buy and sell
securities at high prices in order to maximize future value portfolios.
The other assumption is that people will always engage in economic moves that will
foster their economic self-interest. An individual will desire to invest for the future and in
places where he/she is able to control the product of the investment.
Accordingly, there are some financial models used in money management and asset
valuation which incorporate behavioural finance parameters. Such models include Thalers
Model of price reaction to information, consisting of the under-reaction and overreaction
phases.
The stock image coefficient model also is another model closely associated with
behavioural finance. This model is used in the valuation of stocks for future predictions of
market prices or potential market prices hence profit from the movement.
2. Introduction to Behavioural Accounting
Also known as human resource accounting, behavioural accounting is defined as an
accounting technique which considers and integrates human behaviour into accounting
decisions in an organization. Behavioural accounting can also be defined as the study of the
behaviour of accountants or the behaviour of non-accountants as they are influenced by
accounting functions and reports. It cuts across financial, managerial and tax accounting
research (Hofstedt and Kinard, 1970: 38-54).
Arnold and Sutton (1997) comment that though up to the mid 1960s research in
accounting was unreservedly determined by neoclassical assumptions of the functioning of
capital markets and rational decision making of its actors, changes have occurred with human
beings in the research now being bounded with rationality both as decision-makers and
addressees of accounting decisions in organizations. In behavioural accounting, the behaviour
of human beings in diverse accounting contexts is explained and predicted.
Behavioural Accounting and Behavioural Accounting Research (BAR) are set up to
make transparent the behavioural effects that relate to processes of information gathering,
processing, and implementation in accounting systems (Arnold and Sutton, 1997). As such,
BAR majors on the relationship between human behaviour, accounting structures, and
institutional efficacy.

- 310 2.1. The Relationship Between Financial Accounting, Management Accounting and
Behavioural Accounting
Financial accounting is a branch of accounting that narrows down on the readying of
fiscal statements for decision makers who include proprietors, stock brokers, employees,
contractors, banks and government organizations. The focus of financial accounting is majorly
outside a company.
Management accounting primarily focuses on the delivery to and utilization of
accounting information by managers within businesses, in order to afford them the basis to
make informed business choices that will equip them better in their management and control
tasks. Horngren (1977: 673-692) describes managerial accounting as designing formal controls
that avail goal congruence and incentive through the use of technical tools (Hopper and Powell,
1985: 429-465).Its focus is predominantly within a company.
These two abovementioned divisions of accounting and behavioural accounting rely on
different avenues to offer useful information required to make sound economic decisions.
Financial accounting is chiefly centered on figures that give an overview of a companys fiscal
strength in terms of profitability and in the long run, turn over. Managerial accounting in
contrast seeks to review the accountability of an organization .These three divisions
consequently enhance one another in guaranteeing the appropriate information needed by the
company to carry out crucial economic decisions is accessible. Such decisions encompass
mergers, procurements, buy outs, expansion as well as specialization.
In summary, managerial, financial and behavioural accounting synergize to touch
general purpose fiscal statements, make available information used by management of a
business firm for policy making, scheduling and performance appraisal, and in order to satisfy
regulatory requirements.
2.2. Basic Concepts of Behavioural Accounting
These concepts are very closely related to financial accounting concepts. Gynther (1967:
274-290) reports that this discipline suffers from inability to devise, deduce or build a general
theory on which to base the necessary lesser theories and events, operations and organizations.
One is thus left with no option but theories which cannot be interrelated or fitted to any one
framework of accounting in a logical manner.
Consequently, the key accounting concepts that have been closely linked to behavioural
accounting are the entity concept and the proprietary concept. These concepts are founded on
broadly accepted accounting principles not of a particular country but according to
international financial reporting standards. The list of such models includes graphic accounting
equation which infuses profit and loss accounts, properties, liabilities, equity, trial balance, and
balance sheets.
2.3. Factors Affecting Behavioural Aspect of Accounting
The administrative levels of a company have a big say in shaping the behavioural
accounting system. Because this branch of accounting counts on decision makers, their
experience and motivation has to be in prime condition so that the corporation realizes its true
financial strength.
Other factors for instance lack of proper information on the right practices expected
contribute negatively to the subject. It is not uncommon to find accounting practitioners who
do not know what the ideal approach is they should adopt to achieve optimum results in the
firms.
3. Common Points, Differences and Comparison of Behavioural Finance and
Behavioural Accounting

- 311 Noteworthy is the observation that there is no economy theory which can function well
without incorporating human behaviour as Breitkreuz (2008) correctly opines. Conventionally,
economic models used the concept of rational acting market participant (homo economicus),
but behavioural science, psychology and other helpful disciplines are now all being embraced
in economics.
It is paramount to know that both behavioural finance and accounting use social,
cognitive and emotional factors in comprehending the economic decisions of both individuals
and companies executing economic functions. Included in this are borrowers and investors as
well as the subsequent effect on market prices, profits and resource allocation.
As such, these areas are concerned with the limits of rationality of economic agents.
Models of behavioural finance and accounting assimilate insights from psychology with neo
classical economic theory. Nevertheless, predictors are concerned with public choice in
addition to effects of market decisions. It is for this reason that profitable decisions with
associated biases towards promoting self-interest have been made.
It is also evident that both disciplines are simulators of microeconomics and thus their
link to psychology. Similar to this is the case of the classical period during which Adam Smith
through his theory of moral sentiments endeavored to explain individual behaviour while
Jeremy Bentham wrote comprehensively on bedrocks of utility. This was however repackaged
during neo- classical economics and made a discipline of natural science deducing economic
behaviour.
3.1 Common Points
Numerous concepts as well as theories have been applied within behavioural finance
and behavioural accounting as seen in the works by Libby and Fishburn (1977), Birnberg and
Shields (1989), Davis (1995), Ashton and Ashon (1999), Ciancanelli, Coulson and Thomson
(2001), and Libby, Bloomfield and Nelson (2001) among others (cited in Ricciardi, 2004).
The shared research interests include the topics of heuristics, prospect theory, mental
accounting, and risk-taking behaviour and more recently, perceived risk.
Thaler (1980: 39-60), records that one main application of these disciplines, the
behavioural life cycle hypothesis states that people mentally frame assets as belonging to either
current income, current wealth or future income. This has implications for their behaviour as
the accounts are largely non fungible and marginal propensity to consume out of every account.
Framing is another common point shared between behavioural finance and accounting.
Framing issues occur when indistinguishable or equivalent depictions of outcomes or items
result in different final decisions or inclinations (Ricciardi, 2004).
Also to be included among common points also are the different fallacies associated
with behavioural accounting and finance. Diverse fallacies constitute this branch of economics.
Formal fallacies described as fallacious arguments due to an error in their technical
structure are one of such fallacies. Under this category of fallacies are appeals to law, appeals to
probability, arguments from fallacy, base rate fallacy, conjunction fallacy, correlative based
fallacies, fallacy of necessity and false dilemma.
Others are propositional fallacies, quantificational fallacies, formal syllogical fallacies,
informal fallacies and faulty generalizations.
3.2 Differences
In as much as these two disciplines have common points, they also have a number of
differences which are hereby highlighted. The first and most striking difference is the manner in
which concepts and models vary respectively. As a direct consequence of differences in the

- 312 technicalities associated with the carrying out of behavioural finance and behavioural
accounting practices, the crucial models as well as the vital models inevitably vary accordingly.
Based on experimental research carried out, there are indications that behavioural
accounting leans towards the most use of mathematical or statistical methods when compared
to behavioural finance. This is true to expectations because accounting duties often deal with
tables and figures.
In addition, in behavioural accounting only the attitudes of those concerned with
accounting field are covered whereas in the case of finance behaviour, one goes deeper to find
the influencing attitudes in markets, corporates as well as amongst individuals.
Furthermore, behavioural finance lays emphasis on the effects the biases of an investor
have on the behaviour of financial markets. In the scenario involving behavioural accounting,
one narrows down their focus to the results of managerial biases on accounting and reporting
issues (Marnet, 2008).
In a nutshell, the differences outlined above are just but divergent ways of providing
effective information to help in the process of making decisions that is associated with
investment and accounting matters. In the end everything is geared towards the achievement of
a collective goal of economics in totality.
3.3 Comparison
Upon a critical evaluation of the similarities and differences between behavioural
finance and behavioural accounting, it is possible to surmise that the two disciplines
highlighted in this paper are more similar than different. In order to identify overlapping
contents of behavioural research in finance and accounting while distinguishing the areas of
diversity, selected studies from Behavioural Finance Research (BFR) and Behavioural
Accounting Research (BAR) need to be comparatively analyzed (Breitkreuz, 2008). For the sake
of illustration, the prospect theory can be seen to apply to both disciplines because it is an
example of the generalized expected utility theory. Importantly though, it is motivated by
concerns over the accuracy of expected utility theory.
The other similarity is seen in inter-temporal choice being common in behavioural
finance and accounting. Inter-temporal choices involve hyperbolic discounting as a tendency to
discount results in near future than for outcomes in the far future. This motif can be well
elucidated using models of sub additive discounting that are able to tell apart the delay in
addition to the interval of discounting.
Additionally, the neo classical assumption of perfect selfishness as considered in
inequity aversion and reciprocal altruism also tends to be attached to both case scenarios.
The methodology an individual would use to arrive at conclusions is similar for the
cases involving behaviour accounting and finance. Using functional magnetic resonance
imaging, the researchers are able to determine which area of the brain area is active during the
making of economic decisions. Such experiments simulating markets such as stock trading and
auctions can be used to isolate the effect of a particular bias upon behaviour.
Furthermore, the area of heuristics is another area of similarity. This is where people
often make decisions based on approximate rules of thumb instead of strict logic. Herd
behaviour, overconfidence, as well as overreaction and underreaction are all forms of heuristic
processes (Johnsson, Lindblom, Platan, 2002).
Other similarities include framing, and market inefficiencies (which encompasses
mispricing, non-rational decision making and return anomalies). The models used in
behavioural economics characteristically seek to address a particular market anomaly and
adjust standard neo classical models by defining decision makers as using heuristics and prey
of framing effects.

- 313 In general, behavioural economics continues to reside within the neo classical
framework although the customary assumption of rational behaviour is often challenged. While
the exploration of human behaviour in finance theory has a long tradition, research in the area
of psychological effects in accounting started not earlier than the mid of last century
(Breitkreuz, 2008).
Conclusion
In conclusion, the chief goal of modern financial reporting is to supply useful
information that can be used by actual and potential investors within the process of their
decision-making framework. As information processing of agents on the market for equity is
part of finance theory, this is the point where behavioural accounting and behavioural finance
converge (Breitkreuz, 2008).
Of significant importance is the fact that that the main aspect of the study is psychology
or attitudes during decision making which are often emotional. Consequently, this has led to
many misconceptions and errors during investment ending up in many economic problems.
Most critics of the behavioural theory have emphasized the rationality of economic
agents and argue that experimentally observed behaviour is limited in its application to market
situations, since learning opportunities and competition ensure at least a close approximation of
rational behaviour.
An action point would therefore be the proposal that behavioural economics be
therefore used to eradicate fallacies and assumptions as well as efforts be made to rectify the
mistakes made by investors as pertains to their reaction to news of changes in stocks. This will
work towards increasing the level of returns per investment.
Another important point to note is that investment information is very significant and
therefore behavioural outlooks should be transformed. For example, the occurrence of an event
(positive or negative) does not necessarily mean that a subsequent event will either be
systematic or opposite. The situations should be seen as mutually exclusive and addresses with
that in mind.
The information generated is much more useful to external stakeholders who might
want to know what the exact financial position of a firm is. This may profit the government in
helping it to determine taxes, investors who may desire to unify or procure, or may even be
used by auditors.
Just as Thaler (1999) predicted, behavioural finance is becoming less and less
controversial in comparison to yester years when it was under lots of attack on its credibility.
With the great paradigm shift that behavioural finance and accounting have come with, most
researchers have been slow to embrace the changes opting to stick to the traditional economic
theories. In comparison, there exist three different categories of behaviourists. The first category
are the most controversial who endeavour to demonstrate that behavioural modifications have
the capacity to offer helpful insights and incremental predictive power in even the most
competitive and disciplinary institutions (Bloomfield, 2010). The second lot labours to show that
some organisations are less effective compared to others in matters of correcting individual
deviances from the homo economicus supposition. Lastly is the category of behaviourists who
pick out fiscal settings in which behavioural forces are widely viewed to be only weakly
disciplined for instance as decisions by individual managers in poorly operated labour markets.
These researchers stir the least controversy with minimal engagements with the traditionalists.
It is thus the task of behavioural researchers to augment their efforts to exhibit that the
influence of behavioural factors is arbitrated by the ability of institutions (such as competitive
markets) to scrub aggregate results of human idiosyncrasies. With such work, a common
ground will be forged between traditionalists and behaviouralists, while at the same time
identifying contexts where behavioural research is expected to have the most predictive power.

- 314 This is because the true significance of interdisciplinary research is providing scholars in the
field a fuller understanding and improved body of knowledge concerning the past, present, and
future direction (Ricciardi, 2004).
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