Management Accounting Section Midyear Meeting

Reasonable versus Rational: The Effects of Judgment Standards on Managerial Decisions

• In Event: Managerial Decisions

Abstract

Prior research in psychology indicates individuals hold an implicit theory about what it means to behave rationally or reasonably. We rely on that research to examine whether individuals respond to guidance to behave rationally or reasonably in predictable ways. To examine this research question, we conduct two experiments modeled after well-known prior research in management accounting. First, in a budgeting setting, we find that managers guided to report rationally misreport more than those guided to report reasonably. Second, in a subjective performance evaluation setting, we find that managers guided to behave rationally are less likely to compensate subordinates for bad luck than managers guided to behave reasonably. Our results support the argument that different standards of judgment can be applied in different contexts, and suggest that firms can direct employee behavior according to preferred judgment standards using relatively low-cost instructional guidance.

Authors

• McKay Jones, University of Wisconsin - Madison

• Theresa A Libby, University of Central Florida

• Steven D. Smith, Brigham Young University