Knowing vs. Applying Accounting Causal Relationships: Experimental Evidence on the Decision Performance Effects of Problem Similarity and Comparison
55 Pages Posted: 31 Jul 2005
Accountants tend to overlook relevant principles and causal relationships that are commonly taught in education and experienced in practice. This raises the question: Do accountants apply what they know? This study relies on analogical reasoning research to develop and test predictions about the tendency of accountants to omit key causal relationships in a challenging decision setting: recommending revenue-maximizing strategies to a client in the midst of a business-model change. In our experiment, we first elicit comparisons of various source problems from some of our participants (the comparison condition), but not from the others (the advice condition). Next, the participants assume the role of a business consultant and recommend ways to improve a client's revenue in a new setting. The new setting shares with the source problems either (1) a key causal relationship and several literal similarities (the literal similarity condition), or (2) a key causal relationship but no literal similarities (the relational similarity condition). We predict and find that comparison enhances the quality of accountants' recommendations when the source problems are literally similar to the new setting, and that depriving participants of literal similarities enhances the quality of recommendations when participants do not make comparisons. Our findings show that similarity and comparison help reduce the gap between knowing and applying accounting causal relationships in new settings. Additional tests confirm that the findings are not explained by whether a participant is equipped with the key accounting causal relationship. The study has implications for decision making in seemingly familiar but complex settings, such as revenue-enhancement or cost-containment decisions following business-model changes.
Keywords: causal-knowledge representation, literal vs. relational similarity, comparison and advice, accounting causal relationships
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