Individual Choice Studies

There are a variety of reasons for the popularity of individual-focused research in BAR.
The first is simplicity. Considering the individual investor, auditor, etc., in isolation lends
simplicity to both the study’s research model and its design. It also simplifies the analysis
and interpretation of the results. The second is parsimony. It takes the fewest number of
participants to achieve the desired number of observations per cell. This is especially
important when the participants are professionals. The third reflects the models
generated in the disciplines on which BAR has drawn most heavily _economics and
psychology_. Both contain a significant literature relating to how the individual makes a
decision. Sociology and organization theory consider the “group” to be the smallest unit
and have been drawn on by BAR to a significantly lesser extent. Individual choice studies
in BAR can be divided into two types, depending on the type of variable investigated.
One group of studies is interested in better understanding the impact of elements of the
setting within which the individual acts on the individual. The other is concerned with the
appropriateness of rational wealth-maximizing characterization of the decision maker.
Four elements of the task setting are of particular interest in individual BAR. These are
incentives, participation, accountability, and systems interface. The first two are the
focus of a significant portion of BAR; the latter two, much less.

Incentives. initiated experimental research on the role of incentives in BAR. This line of
BAR literature typically uses the principal-agent model to generate hypotheses. For a
survey of the economic models of incentives, see Prendergast _1999_. In general, the
studies report that incentives matter and the nature of the incentive system impacts an
agent’s behavior _

Participation. Participation is, essentially, concerned with the honesty of

communication within the organizational hierarchy. Early BAR investigated how
accurately the workers/agents would communicate their private information. Would they
use it to create slack? Generally, the answer was yes _e.g., Young 1985; Shields and
Shields 1988_.3 However, as discussed subsequently, later research recognized the
strategic nature of the interaction between the subordinate and the superior and
modeled participation as a negotiation process.

Accountability. Given the function of accounting, it is surprising that the formal

development of accountability was in psychology _see Lerner et al. 1998 for a review_
despite the obvious link to management accounting research; that is, the effect of
evaluation on individual behavior _e.g., Argyris 1952; Prakash and Rappaport 1977_. The
notion of evaluation in BAR is not limited to management accounting. When the superior
in an audit team examines the work of a subordinate or a client examines the work of a
tax professional, an “evaluation” is taking place. The difference between the evaluation
literature and BAR on accountability is reflected in the breadth of the questions they ask.
The evaluation literature focuses on how the accounting system _e.g., the performance
indicator_ affects the extent and direction of the effort provided by the “workers”
_Prakash and Rappaport 1977_. Accountability BAR not only asks for what the worker
feels accountable, but also asks to whom the “worker” feels accountable when facing
conflicting demands _e.g., Johnson and Kaplan 1991; Messier and Quilliam 1992_, or how
elements present in the accountability setting _e.g., a need to justify one’s actions_
affect the worker’s behavior _Ahrens 1996_.
Miller et al. _2006_ recognized that there is an element of mutual accountability in the
evaluation process. The superior likely has a prior relationship with the subordinate and
in many instances must “justify” any evaluation he/she makes. Their study focuses on
the reviewer in an audit setting. While the study only examines one party to the dyad,
their findings suggest that factors such as familiarity between the two parties can affect
the reviewer’s assessment. There may be limitations on the ability to perform these
experiments with professional participants in dyads because of the potential impact on
the participants’ post-experimental relations.

Systems interface. Information systems in BAR essentially are viewed as decision aids.
They are discussed under various labels, such as decision support systems _DSS_ and
knowledge based systems _KBS_. The DSS typically is used in the management
information systems literature to describe an information system intended to support a
specific decision and is closest to the term decision aid _DA_, which typically is used in
auditing to describe what may or may not be a computerized calculating system. In
contrast, the KBS refers to a database collected for a specificarea of inquiry _e.g., XBRL_.

The simpler of the two is the DSS. Two broad questions are researched under DSS. How
well are the systems utilized by those for whom they are intended? And, what
characteristics of the DSS facilitate or inhibit their utilization? Specific issues researched
under the former include not only whether the DSS improves decisions, but whether the
potential users utilize them and whether the system can be used to facilitate learning.
They differ from the individual choice BAR studies discussed earlier _i.e., that examined
how the individual responds to specific outputs of the system_. Those studies typically
are linked to cognitive issues and the use of accounting data _e.g., Lipe and Salterio
2000; Dearman and Shields 2005_. The papers discussed in this section are concerned
with the utilization of a DSS as a DA designed to assist an individual perform a specific
task. In general, they report that the DSS is not always utilized _e.g., Whitecotton 1996;
Eining et al. 1997_.

Whitecotton _1996_ found that auditors’ reliance on the DA was inversely related to their
confidence in their own judgment. Obviously, this raises two questions. Is the auditor’s
confidence appropriate? And, how do those using the DA perform relative to the best
auditors? Rose and Wolfe _2000_ shed some light on the second question. Using student
participants and a tax calculation task, they report participants who performed the
calculation using “pencil and paper” rather than the DA outperformed the best DA-
assisted group by 22 percent, but required 112 percent more effort _Rose and Wolfe
2000, 297; also see Glover et al. 1997; Borthick et al. 2006_. It is important to learn
whether the results can be replicated with professionals because it is likely that
their judgment is superior to that of the students.

Arnold et al. _2006_ studied the type of data from the KBS used by _relative_ novices
_senior/ v staff auditors_ and _relative_ experts _partner/manager_. The two groups
differed on several dimensions. Novices chose feedforward explanations, while the
experts chose feedback. Arnold et al. _2006_ report that the greater the experts’ reliance
on feedback explanations from the KBS, the greater their adherence to the KBS’
recommendation.

There also are interactive systems intended to facilitate access to larger databases.
These DSS are intended to improve the quality of decision making or assist in training.
The issues considered revolve around the usefulness of the database. In BAR, the issue
typically can be framed in terms of the behavioral characteristics of the user and the
usefulness to the user of the DSS. The XBRL is an example of such a system. It is
intended to enhance the user’s ability to obtain and understand financial data about the
firm. Hodge et al. _2004_ found that nonprofessional users of financial statements were
better able to ascertain the impact of differing reporting methods for stock options
between firms using the XBRL than without it. However, like Rose and Wolfe _2000_, they
reported that many of their participants did not utilize XBRL. Other BAR has as its
purpose examining the use of DSS as a tool for training/educating novices.

Alternative modes of communicating information, such as graphs, frequently are used in

reports. For example, nonnumerical formats are regularly used in corporations’ annual
reports, internal reports, and our research. This issue initially was asked by MIS
researchers in the 1970s _Dickson et al. 1977_ and subsequently extended _e.g., Vessey
1994_. Despite the extensive use of pie charts and graphs in internal and external
reports, there is little research in BAR on this topic _for an exception, see Amer 2005_. In
marketing, MacKay and Villarreal _2007_ found that the recipient’s ability to take
advantage of the simpler nature of nonnumerical data is likely to vary among individuals.
An interesting example of earlier research in this area, using faces to communicate
financial data, was reported by Moriarity _1979_.

Noneconomic Dimensions Affecting the Individual

The above dimensions of the task are essentially elements of the task setting in which
the individual makes a decision. They typically are set by the organization or
environment within which the decision maker is operating. The decision maker also
brings certain characteristics such as trust and fairness to the setting. These
characteristics may be _relatively_ stable for any decision maker _e.g., desire to be
treated fairly_, or they may vary with the situation _e.g., the decision maker’s mood_. In
this section, these characteristics as they relate to individual choice are discussed.

Ethics. Closely related to the study of norms is the study of ethical behavior. The former
often is researched in the context of what others expect the actor to do, while ethical
behavior typically refers to the actor’s behavior. Noreen _1988_ offers a theoretical link
between ethics and agency theory. He argues that parties to the contract could be
expected to follow social norms. Early BAR on ethics focused on the participants’ moral
development _e.g., Ponemon 1990_. These studies are concerned with two issues. How
developed is the moral reasoning of particular individuals/groups? And, how does a given
level of ethical development affect participants’ onthe- job behavior? These two
questions can easily be adapted for BAR in any of the accounting sub-areas. The broader
issue is how significant the ethical issue is in that sub-area. Auditing researchers have led
the way in considering the role of ethics in BAR. For reviews, see Louwers et al. _1997_
and Jones et al. _2003_.

Like the cross-culture research described earlier, the ethics-based research has been
characterized by issues over how to measure the level of ethical development/behavior
of the participants. This is not surprising since, like culture, the level of an individual’s
ethical development is not observable _as distinct from actions_. For a discussion of the
different approaches, see Cohen et al. _1996_

In a post-Enron world, BAR in both auditing and management may find the issue of
increased importance. The problem facing the researcher is likely to be one of access. To
minimize the degree of intrusiveness and obtain responses, this research typically relies
on surveys or cases to elicit responses. There also appears to be a reluctance to publish
these papers in the mainstream accounting journals. A significant number of BAR studies
have been published in The Journal of Business Ethics _e.g., Arnold et al. 2007; Emerson
et al. 2007_.

Two tax-oriented ethics studies suggest possible studies for management accounting
behavioral researchers. Fleischman et al. _2007_ demonstrate the linkage across the
various aspects of individual-focused research. The paper examines the evaluation by
managers in a case concerning the ethical behavior of a spouse in the context of a tax
setting _innocent spouse rule_. The paper explores the potential existence of the
innocent spouse rule as a norm and the extent to which research in ethics by behavioral
scientists can explain it. Similar studies might be conducted in management accounting.
They could relate the participant’s response to the firing of an innocent manager and, for
example, the participant’s predicted subsequent job behavior. This behavior relates to
the issue of perceived fairness discussed earlier. In the area of financial accounting, Rose
_2007_ related how what could be labeled _un_ethical reporting by management leads to
_dis_trust on the part of investors.

Cruz et al. _2000_ report that tax professionals’ willingness to resist the client’s desire for
aggressive tax reporting is positively correlated with professionals’ score on the
Multidimensional Ethics Scale. This raises the question of how a subordinate might
respond to a superior’s efforts for a more favorable set of budget estimates Would a
measure of ethical development predict the likelihood of cooperation? In an experiment
in financial reporting, Vance et al. _2008_ hypothesized and found that the better the
superior-subordinate relationship, the less likely the subordinate was to resist the
superior’s request for aggressive financial reporting.

Two sets of BAR studies have extended early BAR on ethics in interesting ways. They
examine the impact of the individual’s environment on the individual’s ethical behavior.
Booth and Schulz _2004_ examine the impact of the organization’s ethical climate on the
individual’s behavior. In a laboratory study, they find that holding the participant’s level
of ethical development constant, the behavior of the participant moves in the direction of
the organization’s ethical climate. There is no reason to believe that similar results would
not be found in the effect of the permissiveness of audit firms on auditor behavior.

Spicer et al. _2004_ and Bailey and Spicer _2007_ linked cross-cultural research and
ethics.Earlier studies had reported ethical differences among auditors in different
countries _e.g., Patel et al. 2003; Arnold et al. 2007_. Spicer et al. _2004_ and Bailey and
Spicer _2007_ researched the ethical norms of a culture on individuals raised in a
different culture. In their studies, they studied U.S. expatriates in Russia involved in the
Russian business community. They report convergence in ethical attitudes and intended
behaviors between U.S. expatriate and Russian respondents to their ethics survey. The
U.S. expatriates in their study responded more like their Russian counterparts than U.S.
nationals in the U.S. The respondents also expressed similar attitudes toward
organizational practices that violated the ethical standards or “hyper-norms.” The U.S.
expatriate respondents who were highly integrated into the Russian community
expressed ethical attitudes similar to those of Russian respondents under conditions of
“local _Russian_ norms.” In both cases, the ethical attitudes of Russians and Americans
converge despite the differences that might have been expected to arise due to their
respective national identities.
Mood. Recently, psychologists, experimental economists, and accountants have begun
to examine the role of the decision maker’s emotional state _affect_ on the decision
process. These studies could be important if different mood states affect the decision
maker’s perceptions and decisions. While mood could affect strategic interactions, the
research undertaken in BAR thus far has focused on the individual decision maker.

The rationale underlying studies of this type is that mood affects the nature of the prior
experiences retrieved from memory. Positive mood states lead to retrieving positive
outcomes in comparable situations and vice versa. Wright and Bower _1992_, in a BAR-
related study, reported the effect of decision makers’ emotional state _happy, neutral, or
sad_ on their perception of th degree of riskiness of a decision and probability of success.
As they conjectured, the subjective probability estimate is influenced by the decision
maker’s mood. “Happy” decision makers give higher probabilities for the outcome of
positive events and lower probabilities for the outcome of negative events. They report
the opposite results for “sad” decision makers.

In an accounting context, Moreno et al. _2002_ and Kida et al. _2001_ report similar
results. Consistent with these results, Chung et al. _2007_ studied auditors making
inventory valuation decisions and find that mood state affects the degree of
conservatism in the auditor’s inventory valuation. Auditors in a positive mood are less
conservative than those in a negative mood. Moreno and Bhattacharjee _2008_, in a
single-party study _the other party did not actually exist_, report that knowledge of the
other party’s emotional state affects bargaining behavior. For a discussion of the
literature arguing that emotion can enhance the individual’s ability to make rational
choices, see Ackert et al. _2003_.

Psychologists and experimental economists have studied other emotional states that
could be of interest to accountants. Lerner and Keltner _2000, 2001_ report that fearful
participants make more pessimistic estimates and more risk-averse choices, while anger
leads participants to make more optimistic risk estimates and risk-seeking choices.
Interestingly, the responses of angry participants more closely resembled those of happy
participants than those of fearful participants. For reviews, see Lerner et al. _2004_ and
Pham _2007_.

An interesting issue raised by these studies is whether the effect of these emotions is to
make people overly optimistic/pessimistic. We cannot conclude one way or the other
without having some baseline measure of the probability. What should the individuals
believe the probability to be? Since the participants disagree, we can assume that their
emotional state has led at least one of the groups to be incorrect, but that does not
preclude the possibility that they both may be in error. Ideally, further research will be
undertaken in this area where there is a known “correct” answer. A topic that conceivably
could be related to the issue of optimism/pessimism is the effect of regret in decision
making. It has been shown to have an impact in many nonbusiness decision settings
_e.g., Gilbert et al. 2004_.

A paper by Libby et al. _2008_ suggests that optimism/pessimism is not always the
“irrational” result of the decision maker’s emotional state. They report that in some
circumstances optimism/ pessimism may be the result of the incentives. If analysts
desire good relations with management, they report that, all else being held constant,
the optimism/pessimism of sell-side analysts is a deliberate act and not based on an
emotion or trait. Two recent studies suggest the possibility of yet another emotion that
could be affecting worker behavior—guilt/guilt aversion. These studies also illustrate how
labels potentially can serve to separate like ideas. Schnedler and Vadovic _2007_
hypothesize and find that guilt aversion motivated participants to exert effort beyond the
minimum required by the control system. One might conjecture that this merely renames
the concept embodied in “gift exchange” _e.g., Hannan 2005_. Staffiero _2006_ used
guilt to describe the behavior of individual members of Japanese work groups. The
workers felt guilt when they made insufficient contributions to their work group. In
contrast, Birnberg and Snodgrass _1988_ offer a more positive explanation of this
behavior, suggesting that the outcomes to other members of the group may have a
positive utility to an individual member. Failure to achieve the group’s goal results in
lowered utility because of the loss to others as well as to oneself.

Fairness. While the perception of fairness has primarily been researched in strategic
settings, the perceived fairness of the accounting system affects the behavior of the
individual in individual choice settings as well. Libby _2001_ and Hufnagel and Birnberg
_1994_ found that the participants were sensitive to the perceived unfairness of the
accounting system _procedural fairness_ even when they were not adversely affected by
the rule or system.

Physiological Measures and BAR

Behavioral accounting researchers have tried a variety of methods to understand
decision processes. The methods utilized are relatively non-intrusive, but provide greater
insight than observing an outcome/response in an experimental setting. These
approaches include think-aloud protocols _e.g., Bedard and Biggs 1991_ and data boards
_e.g., Shields 1980_. These approaches yielded insights into “cognitive flow” or the
decision process being followed. However, both of these methods directly involve the
participant and are limited to reporting the decision maker’s conscious behavior. The
methods discussed in this section measure the same behaviors discussed earlier, but use
methods intended to measure physiological changes.
Hunton and McEwen _1997_ utilized an eye movement retinal imaging computer to study
the information search strategy of financial analysts. Unlike protocol analysis that relies
on selfreporting and data boards that report only choices, they were able to track the
search strategies of the analysts in a less obtrusive but more detailed manner. They were
able to observe data scanned but not reported _protocols_ or chosen _data boards_ by
the participants. Consistent with data board research, they found that the more accurate
analysts used a directed rather than a sequential search strategy. Their search appeared
to be motivated by hypotheses generated by the process. 4 In finance, Lo and Repin
_2002_ used more traditional methods _electro-dermal and pulse rate measures_ to
measure the emotional state _level of excitement_ of ten stock traders while they were
actually trading. Lo and Repin _2002_ found significant differences between periods when
significant market events were and were not taking place. They argue this suggests that
emotion is a relevant component of the traders’ decisions. Their data suggest that the
response varies with experience, but the sample is too small to draw any statistically
significant conclusions.

Neuroeconomics and Neuroaccounting

Recently researchers studying decision making have taken a new approach. Working with
neuroscientists, they have gone one step deeper inside the “black box” that is the
decision maker. Using various devices, they observe the patterns of brain activation as
individuals make choices _e.g., McCabe et al. 2001; Camerer et al. 2005; Knudsen et al.
2007_. Given the neuroscientists’ knowledge of the function of the brain centers,
conclusions can be drawn about what underlies the observed behavior. By moving one
step closer to the decision maker’s cognitive activity, the role of the stimulus and the
response changes in an interesting way. The decision, typically considered the response
in BAR studies, now is the stimulus and the brain center activation is the response. This is
in contrast to traditional research in BAR where researchers observed behavior and
inferred the underlying cognitive processes or extracted them from protocols.

Thus far, little research of this type has been undertaken by behavioral accounting
researchers except for John Dickhaut _e.g., Dickhaut et al. 2003; Smith and Dickhaut
2005; Rustichini et al. 2005; Dickhaut 2009_. Dickhaut and his colleagues have papers
_Dickhaut 2009; Dickhaut et al. 2009a, 2009b_ using neuroscience to study the evolution
of recordkeeping _i.e., accounting_. However, none of these papers provide the type of
systematic review of the possible link between neuroscience and BAR that can be found
for finance in Sapra and Zak _2008_, who offer neuroscience explanations for observed
behaviors in financial decision makingm where data from neuroscience and
neuroeconomics are available.
While potentially quite insightful, there are at least three reasons why research of this
type will progress more slowly than other types of BAR. First, it requires cooperation with
a researcher possessing access to machines to perform the scans and skilled in reading
brain scans. Second, it would appear that research of this type is quite expensive. Third,
explaining the findings to other BAR researchers may be difficult. Moreover, the results
may not eliminate the issue of “hardwired” versus “learned” behavior as the explanation
for the response.

An example of neuroeconomic research’s potential relevance to BAR can be illustrated

using the findings of Luft _1994_ and Hannan et al. _2005_. Luft _1994_ found that
participants in her study preferred a bonus to a penalty pay scheme even though the
payoffs from the two systems were equivalent. Hannan et al. _2005_ found that the
participants in the penalty condition exerted more effort. Given that neuroscientists have
shown that different brain centers are used to measure pleasure _reward_ and pain
_penalty_ _Delgado et al. 2000_, this raises the question of whether the preference for a
bonus scheme reflects differences between the pleasure and pain brain centers
_“hardwired” neuroscience explanation_ or whether it is the approval implied by the
“reward” and disapproval associated with a “penalty” _a social psychology issue of
intrinsic reward_. Barnea et al. _2009_, using Swedish data on twins to study investing
behavior, suggest that there is both a genetic and a learned component.

A series of neuroscience studies may provide some insight into what is happening. Using
the ultimatum game, Tabibnia et al. _2008_ report MRIs of the brain that suggest similar
results to those above for fair and unfair behavior. Their design utilized an individual
choice study using only participants who receive the “offer” _ultimatum_. First, the
results suggest that the _recipient_ participants differ in what they believe to be a fair
offer. Second, those who judge the offer to be “unfair” show different patterns of brain
activity than those who consider the offer to be “fair.” Finally, participants who accept an
unfair offer had different patterns in their MRIs than those who reject unfair offers
_Tabibnia et al. 2008_.

A study by Harbaugh et al. _2007_ that relates brain activity to altruism in decision
makers also illustrates the potential link of neuroscience to BAR. They studied the brain
scans of 19 female students who were asked to make a decision allocating $100 between
a food bank and themselves. The brain scans of the “altruistic” _gave more_ and “selfish”
_gave less_ participants show that the altruistic participants exhibit greater activity in the
part of the brain that reflects pleasure than do the selfish participants. The altruistic
participants show significant activity in that part of the brain even when they were
required to contribute a fixed portion of the $100 to the charity. Studies of this type
suggest that there is a physiological basis for the altruistic behavior that is observed in
the real world. It does not explain if the behavior is inherent and hardwired _Hsu et al.
2008_ or related to interacting with people and learned _Andreoni 1990_. The authors
suggest that they believe their results also would apply to male participants had they
been included in the study.

Zak and his colleagues introduced a line of neuroeconomic research that approaches the
“black box” of human cognitive processes in a different way. They argued that the
observed behavior, in this case trust, is based on the brain’s response to a particular
hormone. Trusting participants exhibit higher levels of the relevant hormone than
nontrusting _i.e., economically rational_ participants. This work is summarized in Zak
_2008_. Kuhnen and Chiao _2009_ show that there also appears to be a genetic basis for
the differences in the amount of dopamine and serotonin. In their study these
differences, like those reported by Zak _2008_, are associated with different patterns of
behavior.

Summary: Individual Choice Studies

Overall, research focused on the individual’s decision-making behavior has played an
important role in BAR historically. The predominance of individual-focused research,
particularly among North American and many Australian researchers, is easily observed
by examining a recentissue of BRIA _2007_. It contained 13 papers. All of these papers
could be classified as focused on the individual even though they may describe in the
scenario the existence of another/other hypothetical person_s_ or have a scripted
confederate role-play the “other person.” Equally important is the diversity in
topics/areas in which the research is located. Three were related to auditing.

Four dealt with aspects of management accounting. Three were related to financial
reporting/ decision making. There was one in tax ethics, one in cross-cultural ethics, and
one related to education. While this admittedly is a convenience sample, the results are
similar to Shields _2007_. They likely are representative of current BAR in North America.
A very different view of BAR in Europe would result from examining an issue_s_ of AOS or
other European-based accounting Journals.

This emphasis on individual-focused research is likely to continue to be true of BAR in

North America for several reasons. Many BAR questions focus on the behavior of
individuals acting alone. For example, some of the studies involve one individual’s
processing data provided by another individual or a system _e.g., Fedor and Ramsey
2007_. Others continue to be concerned with the cognitive processes of individuals _e.g.,
Joe 2003_. Still others involve norms, ethics, and culture, which typically have been
studied by examining the behavior of the individual in isolation. Finally, the individual
also may be the easiest approach for researchers.
Individual choice studies do not exist in isolation from the other categories of BAR
discussed in this paper. As the research on strategic choice and group-focused behavior
shows, understanding the behavior of individuals often is the basis for hypotheses about
behavior in dyads and groups. Behavior such as honesty _Evans et al. 2001; Cohen et al.
2007_, that has been exhibited in studies in which the individual does not actually
interact with another participant, can lead to predictions of behavior in dyads and groups
that differ from those of classical economics. This is particularly true because many of
the individually focused studies are studies isolating one member of a network of
individuals. This is readily apparent in the next section in the discussion of participation.

There also are limitations in studying the individual in isolation. In part, this results from
the movement in organizations to make groups and teams the decision-making unit. In
addition, a certain amount of the richness found in the decision-making situation may be
lost when BAR isolates the individual from his or her environment.

Strategic Choice Studies

Studies that explicitly consider the participants’ strategic behavior are relatively new in
BAR, though strategic behavior often was implicit and important in earlier BAR. How
managers behave in a participative management setting is an example of a strategic
setting. Moving from an individual choice study where the actor’s behavior is “inward
facing” to one where another actor’s behavior explicitly must be considered introduces
the strategic dimension to BAR. In contrast to the individual choice studies, in the
strategic behavior studies the decision maker must consider the choices made _or to be
made_ by an actual rather than a hypothetical fellow participant. For example, in a
management accounting study, the “strategy” to which the participant responds could
be the choice of budget level set by another participant acting as “management.” While
an individual choice study informs us how the manager/agent responds to a given budget
level, we do not learn which budget level the owner/principal would choose to offer to
motivate the manager/ agent. In an individual choice study, the researcher may set the
independent variable _e.g., the budget_ at levels different from those a manager actually
would choose.

A significant amount of experimental economics research uses experimental dyads _see

Roth 1995_. In BAR, strategic choice studies recognize the limitations in studying the
individual in isolation from the environment and the importance in many settings of the
behavior of the “other” party on the individual. Some argue that it is important actually
to have the “other party” exist whenever the instructions indicate he/she does.
Experimental economists argue that it is required for one of two reasons. The first is
“maintaining the integrity of the participant pool.” Experimental
economists often utilize the same pool of participants in different studies. In some
studies, the participant’s experience in a prior study even is a criterion for selection.
They argue it is important the participants believe what they are told. If the post
experimental debriefing informs them that something was not really the case, they may
speculate in future studies about the true nature of the study. The other reason relates to
the richness of the experimental setting. Unless the experimenter has insight into how
the other party will behave from prior field or laboratory research, including the actual
behavior of a participant will increase both the potential insights from and the validity of
the study. See Calegari et al. _1998_ for an example of this issue.5

Negotiation Studies
The negotiation process is ubiquitous in the business setting. For a review, see Tsay and
Bazerman _2009_. Audit firms negotiate with clients over changes in financial statements
and accounting methods _McCracken et al. 2010_, firms negotiate with suppliers when
they establish operationally intimate relationships _JIT_, and sub-units within the
organization negotiate transfer prices and/or quantities. While the surface characteristics
of the situations are different, many of the behaviors may be the same _e.g., the
strategies adopted by the parties_. They may differ on information asymmetry, division
of payoffs, and relative power. The degree of information asymmetry would be expected
to affect negotiation, as could the incentives of the parties. For example, in budgeting
negotiations the parties typically are playing a zero-sum game. The slack absorbed by
the worker reduces the manager’s/principal’s profit by a like amount. In other cases, such
as the audit or transfer price settings, the negotiation game being played need not be a
zero-sum game. Rather, a small concession by one party may be significant to the other.
Such an asymmetry in payoffs should affect the negotiation process. Negotiation studies
also can be characterized based on the relative power of the participants: those where
the parties have equal power and those where one party has an advantage.

The significance of the strategic interaction is of particular importance for BAR because
of the importance of performance as a “response.” An example of how individual choice
literature and strategic choice settings are related can be found in Fisher et al.’s _2000_
study of participation utilizing interacting dyads. In the framework utilized in this paper,
this represents a paradigm shift. Early BAR into participative budgeting focused on how
the “worker” would behave. Would the workers take advantage of their private
information to create slack? Young _1985_ even had his participants meet with a
“supervisor” played by the experimenter or a colleague. However, the “supervisor” did
nothing more than accept the worker-participant’s budget. Thus, Young’s _1985_ study
essentially is an individual choice study. While social pressure was present _the design
forced the worker-participant to face a supervisor_, it omitted any negotiation over the
acceptability of the worker’s proposed budget. The explicit power in the situation was
vested with the worker. In reality, the budget-setting process is quite different. In the
natural setting, the supervisor also has significant power. Thus, while Young _1985_
reported how the worker would act in isolation, important aspects of participation are
better captured as a dyad that permits strategic interaction.

A second area of negotiation studies where the use of dyads is present is in the transfer
price literature. Like the participation studies, they are outcome-oriented. In an early
study, DeJong et al. _1989_ test the efficacy of various transfer pricing rules. Haka et al.
_2000_ vary the precision of the accounting data the manager possesses. The
participants receiving the less precise information negotiated strategically. They tried to
achieve the best price at the risk of failing to reach an agreement. In contrast, the
participants with more precise data used the negotiation process to communicate
information to the other party about his or her position in an attempt to reach a more
informed decision. Chalos and Haka _1990_ and Ghosh _2000_ also studied the
negotiation process in the transfer price setting in laboratory experiments. Ghosh _2000_
observed that when the incentive system is consistent with the sourcing of the input, the
systems are perceived as fairer and the participants behaved in a less exploitive manner.
Also see Luft and Libby _1997_.

How humans negotiate and what motivates them to behave in a particular way is a
question of interest to all BAR. Findings in one area have implications for the others.
Calegari et al. _1998_ report two interesting results concerning dyads using an auditing-
based task. One relates to the outcome of the negotiation process, the other to method.
In their study, M.B.A. students, participating in the experiments as “auditors” and
“clients,” exhibited two types of behavior: competitive pairs and cooperative pairs. The
competitive pairs behave as Calegari et al.’s _1998_ economicbased hypotheses predict.
However, the cooperative pairs exhibit what Calegari et al. _1998_ describe as signaling
and cooperative behavior. What causes the pairs to behave differently is an unanswered
question that should interest BAR.

Calegari et al. _1998_ also reported an interesting methodological result. The outcomes
from a human-computer dyad were different from those of the human-human pairs.
Obviously, the computer was not programmed to respond to cues/signals, such as
willingness to cooperate, that the human partner might send. This reinforces the concern
about the limits in utilizing the individual choice style of research when the “other party”
has an opportunity to act/interact strategically. This is especially true where the set of
actions includes choices that could facilitate reaching a noncompetitive, but mutually
beneficial, conclusion.
There are, however, settings when studying dyads in a laboratory may not be practical or
even feasible. This would be especially true in cases such as Calegari et al. _1998_,
where students may not be suitable surrogates for professionals. This raises the issue of
external validity. Researchers have tried to resolve this problem in an audit setting by
studying the negotiation process using professionals as participants in individual choice
studies that “simulate” interacting dyads. For example, Favere-Marchesi _2006_ studied
the initial negotiation postures of auditors and clients over a proposed change in the
financials, giving the same case study separately to each type of participant. They
conclude that ex ante the clients have a better understanding of the auditors’ initial
position than the auditors do of the clients’. In a related study, Tan and Trotman _2007_
proposed and tested a model of when in the negotiation process auditors should make
concessions to clients. Their experiment uses financial officers as clients and a computer
simulation as the auditor who negotiates with the client _via email_. They report the
clients’ responses and the clients’ strategies in responding to the simulated auditor.
However, their findings should be viewed in light of Calegari et al. _1998_. How this initial
difference and differing strategies would play out during negotiations between financial
officers and actual auditors remains an open question. Because of the potential problems
involved in using actual auditors and their clients, it is unlikely to be studied in an
experimental setting using professionals as participants in both roles. We may need to
rely on archival research to understand the behavior of these dyads _e.g., Nelson et
al.2002_.

Settings with explicitly unequal power. Other papers have utilized dyads in
negotiation/ bargaining studies where the parties possess unequal power. These studies
usually investigate the presence or absence of the norm of fairness in economic man
rather than negotiation in a specific setting. They typically utilize either the ultimatum or
the dictator game _Roth 1995_. In the dictator game, one person _the dictator_ is given
an endowment to allocate between self and another party _the recipient_. The recipient
must accept the dictator’s allocation. These studies utilize actual rather than simulated
recipients. Because the recipient is passive in the experimental setting, the use of a dyad
would appear to be intended to meet the criterion of not misleading the participants. 6 In
contrast, in the ultimatum game, the first party’s _the “proposer”_ situation is identical to
that of the dictator except that the recipient now may accept or reject the proposer’s
offer. If accepted, the proposer’s offer determines each party’s payoff. However, if
rejected, both parties receive nothing. The results of studies using both games tend to
support a norm of fair treatment expected by the responders and recognized by the
dictator/proposer _Roth et al. 1991; Berg et al. 1995_. In both the dictator and ultimatum
games, the first party makes an offer approaching, on average, 40 percent of the
endowment _Roth 1995_. This result appears to reflect the recognition by many of the
participants of a norm that sets the “fair” allocation of the endowment.
Cheap talk research in dyads. The typical “cheap talk” study also reflects a setting
where the strategic interaction is germane to the study _e.g., Kachelmeier et al. 1994;
Rankin et al. 2003_. How will the party receiving the nonbinding message react to it?
Obviously, such a study could be done using the individual receiving the message as the
focus. However, such a study would lose the behavior of the participant who is allowed to
make the cheap talk commitment. That individual’s behavior also is of interest to the
researcher. Thus, it is preferable for the study to use a dyad _potential sender and
receiver_ rather than only a receiver. In general, research has found that the cheap talk
often is viewed by the recipient as if it is a binding commitment _e.g., Kachelmeier et al.
1994; Zhang 2008_. Cheap talk studies can be conducted in any setting in accounting
where the context permits one party to communicate with and make a nonbinding pre-
commitment to another party that, if true, should affect the other party’s behavior.

Effect of non-negotiating third party. The work of Fehr and Gaechter _2000_ and
Zhang _2008_ provide insight into why it is beneficial for the researcher to include all the
potential parties in a study. Fehr and Gaechter _2000_ report that a third party, who only
observes unfair behavior, is willing to incur a cost to punish the unfair participant. Zhang
_2008_, in a BAR study, provides an interesting twist on the strategic interaction present
in dyads. The dyad about which she hypothesizes consists of two managers _agents_
who report to the same owner _principal_. She examined the truthfulness and whistle-
blowing behavior of two agents. Each agent’s cost is common knowledge to the two
agents, but asymmetrical information to the principal. Essentially, her findings show that
the strategic behavior of the members of the dyad _the agents_ depends on the
endogenous behavior _fairness_ of the third party _the principal_. The actual presence of
the third party in the study had two benefits. First, it enhances the internal validity of the
study. Second, it ensures that the principal’s behavior in the experiment actually reflects
how the principal would act. In this case, the principal offers a lower wage because of
concerns over being cheated by the agents. This insight, in turn, can serve as a basis for
future BAR on the principal’s behavior in this setting.

Reputation. We all utilize information on another’s past behavior _i.e., reputation_ in

making choices. Similarly, managers must rely on the reputation of other managers in
making investment decisions, and investors, analysts, and auditors rely on managers’
reputations in their interactions with firms. However, there is limited research on the role
of reputation in the willingness of one party to trust another. 7 This reflects the design of
experiments. Most studies, such as those described in the previous sections, use a
“turnpike” approach. The participants are anonymously paired and typically do not “play”
the same participant more than once. This is intended to eliminate reputation as a factor
in decision making and as a potential confound. Thus, the question of the reputation of
individual players must be set aside.

But what is known is that when players interact over time, expectations and reputations
are formed and, moreover, the quality of decision making may improve relative to the
turnpike design _Schwartz and Young 2002_. Duffy et al. _2009_ provide further insight
into reputations. Participants may not always recognize the value of acquiring
information about the other participant’s behavior, a form of reputation. They reported
that participants who initially received costless feedback about the behavior of others
utilized the feedback/reputation-related information. However, those participants who did
not receive feedback information until later in the experiment did not utilize the
information to the same degree. In addition, they report that when a nominal cost is
attached to the feedback, participants did not buy the information even though it was
quite profitable to do so.

Note that in the studies discussed above, reputation is very stylized: it takes the form of
very specific information. This encapsulates the idea of reputation in the laboratory.
However, in the “real world,” the information that goes into forming a reputation may be
subjective and imprecise. Given the role that reputation can play in business settings,
there is room for additional research in this area.

Summary: Strategic Choice Studies

The study of dyads is at the intersection of individual and group BAR. It offers valuable
insights into the individual’s strategic behavior and is important for three reasons. One is
that strategic behavior is integral to many business activities. A second is that
participants act differently when the other party is present rather than hypothetical _e.g.,
Calegari et al. 1998_. Finally and perhaps most importantly, the use of dyads permits the
researcher to study both sides of the strategic interaction and do so over a series of
iterations between members of the dyad. The dyad
may be composed of peers as in Zhang _2008_ and Towry _2003_, or be hierarchical as in
the studies of budget negotiation _Fisher et al. 2000_ and the dictator and ultimatum
games BAR research undertaken thus far suggests that the presence of a “real person”
with whom the participant interacts affects their behavior _Calegari et al. 1998_. BAR
using dyads could be useful in developing a better understanding of how managers and
workers, as well as auditors and tax professionals/payers, behave in various settings, in
addition to insights into the negation process. It also could reveal how “soft behavioral
constraints” such as norms can affect behavior. The nature of the interaction can vary, as
can the mechanism used to achieve it. As even the ultimatum game shows, both parties
possess some power _i.e., the ability to affect the behavior of the other_, albeit in some
cases a very “soft” power. The study of how they use this power and how the parties
interact _their strategies_ is what makes the study of dyads interesting. It is important to
note that the results discussed above and elsewhere often run counter to the simplistic
notion of the self-interested, wealth-maximizing “economic person.”

Because dyads can be viewed as a subset of group behavior, studying dyads yields
potentially valuable insights into group behavior. However, there are obvious limitations.
The greater level of complexity facing the individual members of a group increases with
the number of members interacting. Thus, many of the laboratory studies reported below
under group-focused BAR limit the strategic choices available to the interacting parties.
As useful as data gleaned from the study of dyads may be, to better understand the
group phenomenon in question researchers have turned to alternative research methods
relying on naturally occurring events _fieldwork, archival data, surveys, and interviews_.

The ability to undertake research on dyads and observe the strategic interaction of the
parties may not be as easy as the BAR focusing on the individual. Dyad research at least
doubles the number of participants required with a comparable increase in the cost of
the experiment. It also can require a high degree of coordination. The participants must
be available at the same time and, typically, in the same place. This suggests that
research of this type is likely to take place in a laboratory or through fieldwork. The
former is likely to mean student participants; the latter, professionals performing their job
in their natural environment. This would appear to limit the amount of work of this sort
that will be undertaken using nonstudent participants.