BEHAVIOURAL ACCOUNTING

GROUP 2

INTRODUCTION
Behavioural finance integrates ideas from the fields of individual and social psychology with classical financial theory to understand the performance of markets
Psychology Sociology Finance

Behavioural Finance

 Psychology:
The science of mind and behaviour The mental or behavioural characteristics of an individual or group The study of mind and behaviour in relation to a particular field of knowledge or activity

Sociology:
The systematic study of the development, structure, interaction, and collective behaviour of organized groups of human beings.

Finance:
It is a discipline concerned with determining value and making decisions. The finance function allocates capital, including the acquiring, investing and managing resources

THE DECISION MAKERS

The Individual Small investor Portfolio Manager Board of Trustee Member The Group Portfolio of Investors Shareholders Group The Organization Financial Institution Non-profit entity

NEED FOR BEHAVIOURAL ACCOUNTING

Earlier, rational financial theories like CAPM, EMH seemed enough to predict and explain certain events But, these theories are idealistic while people behave irrationally Anamolies in behaviour prompted experts to look into cognitive psychology accounting for irrational behaviour leading to Behavioural Finance

KEY CONCEPTS IN BEHAVIOURAL FINANCE

Anchoring Mental Accounting Cognitive Biases Gamblers Fallacy Overconfidence Herd Mentality Regret Theory Prospect Theory

BEHAVIOURAL MANAGEMENT ACCOUNTING

Management accounting built on behavioral foundations. Management accounting has to be adapted to the different characteristics:
The perception by the individual of what should be the objective function or goals in the firm. The various factors likely to motivate the individual to perform The decision-making model most relevant to particular contexts and most preferred by the individual

LINGUISTIC RELATIVISM

CULTURAL RELATIVISM

COGNITIVE RELATIVISM
The Cognitive model consists of the following steps: Observation of the accounting phenomenon by the decision maker Schema formation or building of the accounting phenomenon Schema organization or storage Attention and recognition process triggered by a stimulus Retrieval of stored information needed for the judgment decision Reconsideration and integration of retrieved information with new information Judgment process Decision/action response

HUMAN RESOURCE ACCOUNTING (HRA)

Human resource Accounting involves valuing the human assets and giving due attention to the effort that the human force puts behind the operation of the company Humans in an organization are the fundamental sources of wealth creation They are the keepers of what is called human capital Human capital can be referred to as the knowledge which the humans posses and use to produce goods and services in market and non-market circumstances

WHY HRA IS NOT ACCEPTED?

In reality, the company does not own the humans The amount of expenditure incurred in training, development and increasing the skill level of employees is considered as cost, as per the accounting practice of the industrial era

Existence of multiple human valuation models

WHY HRA SHOULD BE ACCEPTED?

Humans have the attributes of being assets Amount spent on their development It ultimately leads to incurring benefits such as production, sales and eventually profits It is desirable because it accounts for three times the value of tangible assets Helps in building the organization by recruiting the right people for the right positions

HRA IN INFOSYS
One of the few companies in India which specify the inclusion of human assets in the valuation of its intangible assets Infosys followed the Lev and Shwartz method to value the human resources which estimated the present value of future earning capacity of an employee from the time of appointment till the time of retirement Infosys says that profitability of a knowledge firm depends on its ability to leverage the learn ability of its professionals

HRA IN INFOSYS CONTD

The intangible assets of a company can be classified into four major categories: human resources, intellectual property assets, internal assets and external assets- Infosys website Some excerpts from Infosys website state
The intangible assets of a company can be classified into four major categories: human resources, intellectual property assets, internal assets and external assets Infosys also acknowledged the fact that HRA is the demand of the new economy and the book value constituted only 15% of market share

A SNAPSHOT OF FINANCIAL INFORMATION OF INFOSYS

Consolidated Balance Sheets (unaudited) as of March 31, Canadian dollars (CAD) in million 2010 Assets Current Assets Cash and cash equivalents Investments in liquid mutual fund units Investments in certificate of deposits Trade accounts receivable Unbilled revenue Prepaid expenses and other current assets Total current assets Property, plant and equipment Goodwill Intangible assets, net 2009

2,742 578 269 791 190 167 4,737 1,005 186 12

2,712 906 185 101 3,904 1,151 169 9

EXAMPLES
Wal-Mart
Founder Sam Waltons concern and respect for staff from the foundation of the company creates an environment of trust that persists to this day

Walton met staff, calling them by their first name and encouraged change to maintain the competitive edge. To this day, staff thinks about how Sam would have done it

Toyota recently announced that it would call back 2.3 million vehicles back from the market owing to faulty breaks. Toyotas image took a beating instead of allowing the PR to handle the situation, companies CEO Jim Lentz took the initiative to appear in a conversation popular web community, Digg The conversation was totally transparent and all sorts of uncomfortable questions were posted which Jim answered to the best of his ability. The initiative was hugely responsible not only in minimizing the damage but also to enhance its transparency quotient

CONCLUSIONS
Firms in which the CEO, has less power to influence decisions, will have less extreme performances. With less power, more moderate decisions, will be taken because the CEO will have to compromise with other members of the top management team when they disagree with him Even if managers are benevolent, corporate decisions may be good or bad because managers have different opinions. This raises the question of whether centralization of power in the hands of the CEO is good Firms with powerful CEOs have an average worse performances, than other firms. Firms with powerful CEOs are not only those with the worst performances, but also those with the best performances