The impact of affective reactions on managers' risky decision-making with accounting information
This study examines the impact of affective reactions on corporate managers' risky decision making when using accounting data. While prospect theory and considerable research indicate that decision makers are often risk averse (taking) when deciding between decision alternatives that result in gains (losses), some work suggests that other factors can significantly impact such risky behavior. It is argued here that managers consider their affective reactions when making risky financial decisions, and as a consequence, they may exhibit decision behavior that is contrary to the predictions of prospect theory and that results in the selection of low economic value alternatives.
Corporate managers were asked to choose between investment alternatives that varied in degree of risk. For each decision scenario, an affective context was constructed to elicit a negative or positive affective reaction toward one of the alternatives. Each of the scenarios investigated had a gain and a loss version. The financial data were also constructed to examine whether affect impacted managers to choose alternatives with lower economic value. Experimental and control subjects' choices were compared to determine if affective reactions to specific data within a decision context can impact risky decision making.
The results indicated that affect can significantly impact managers' risky behavior. Managers were generally more risk taking in gain conditions when the less risky alternative had a negative affect associated with it, or when the risky alternative had a positive affect associated with it. Alternatively, managers were generally more risk averse in loss conditions when the risky alternative had a negative affect or the less risky alternative had a positive affect. Therefore, affective reactions impacted managers' risky decision making to such a degree that the resulting decision behavior was contrary to the predictions of prospect theory. In addition, results indicate that affect influenced managers to choose alternatives with lower economic value, suggesting that managers consider affect when determining the overall utility of an outcome. These results suggest that the consideration of affect's role in judgment and choice is necessary to gain a more complete understanding of financial decision making.
0624: Occupational psychology
0633: Cognitive therapy