Egocentrism, Human versus Algorithmic Information Processing, and Selection of Disclosure Medium

• In Event: Accounting and the New Normal: Remote Auditing, Prepopulated Tax Returns, and Algorithms

Abstract

Recent literature demonstrates that expectations of how investors will process information can affect the information that reaches investors in the first place. Yet it is unclear whether the formation of managers’ expectations is entirely rational, or whether it can be systematically biased by certain cognitive factors. In two laboratory experiments and a survey, this study examines how one systematic bias can form, and can cause unintentional distortion in managers’ selection of disclosure mediums by which to release information. Results from the first experiment indicate participants’ utilization of more sensory (video) disclosure mediums is reduced in response to expectations of algorithm-based information processing. Yet results from the second experiment indicate that participants’ trust in assessments of sensory information in video disclosure mediums is greater in response to algorithm-based information processing. Participants thus behave in an inconsistent manner when their perspective is flipped from issuing disclosures to processing disclosures. This finding is consistent with an egocentric focus in perspective taking bias that extends prior psychology literature on the Spotlight Effect and the Illusion of Transparency. This bias can be represented through a two-stage psychological mechanism involving (1) the formation of a setting-specific egocentric default perspective and (2) insufficient adjustment away from this perspective for more similar vs. less similar others. This study contributes to existing literature on financial disclosure, and introduces the role of cognitive biases in driving certain feedback effects being explored in the emerging literature.

Author

• Patrick Witz, University of Wyoming