IMPORTANCE OF PSYCHOLOGY TO ACCOUNTING AS A DISCIPLINE

Psychology affects every discipline in different ways and at different times. It can as well have a
huge impact on the results or success of different tasks and activities. To better understand its
importance on business and accounting as a discipline, it is essential to evaluate the key concepts
in the subject matter in question.

What is Psychology?

Psychology is simply the scientific study of the mind and behavior. Psychology includes the study
of conscious and unconscious phenomena, as well as feeling and thought. It is an academic
discipline of immense scope. Psychologists seek an understanding of the emergent properties of
brains, and all the variety of phenomena linked to those emergent properties. As a social science
it aims to understand individuals and groups by establishing general principles and researching
specific cases.

What is Accounting?

Accounting is a systematic process of identifying, recording, measuring, classifying, verifying,

summarizing, interpreting and communicating financial information. It reveals profit or loss for a
given period, and the value and nature of a firm's assets, liabilities and owners' equity.

Importance of psychology in business

Psychology is a phenomenon. Its role in business administration and management is ever-evolving

and growing in importance. The increase in awareness and education in recent times forces people
to think and act rationally. More and more people are learning the importance of the same and
tapping into the enormous potential of applied and business psychology to be successful.

The importance of psychology in every aspect of business operations and organization cannot be
overemphasized. Understanding the human psychology, be it either employees or customers or
business partners, helps companies in better management and grow their business.

Business is multifaceted, what is common across all the areas, however, are people. All the
stakeholders from the shareholders to the managers to the government to the employees are
comprised of people. Since, where people are involved, psychology is involved, psychology has it
effects on all the aspects of a business. It helps us understand the human behaviour and reasoning
behind thoughts, processes, actions and goals.

The shareholders have a vision before investing in a business. The goals, missions, objectives etc
are based on this vision. The psychology of the share holders helps decide whether the business is
for profit or has a social objective. Share holders decide which shares to purchase depending on
their inherent values and psychology. Some share holders do not invest in stocks of companies
associated with alcohol. This is their personal belief. In small firms where decisions are taken by
the shareholders, management policies are affected by the psychology of the shareholders.

The psychology of the employees is particularly difficult to explain since all employees are at
different levels of the hierarchy. There are supervisors and reportees to consider. There is the top,
middle and lower level managements to consider. All of whom are different and have different
motivations and needs. The top level usually controls the labour force. They should be efficient
and organised. Along with being strategic thinkers, they should also have the ability to predict or
at least understand how people would react to policy decisions and changes. They should have the
ability to be good leaders. Understanding psychology helps managers lead the team to great
success. The middle level needs to lead the lower level but also work according to the guidelines
issued by the top management. Conflict managements, negotiations etc would be common and
they should be comfortable with it. Identifying potential employee related problems and solving
them before the affect the bottom line of the company is necessary for them. The middle level
management should be given proper incentives so that they are loyal to the company. The lower
level management should have outlets for grievance redressals.

They should be made to feel a part of the company. Attrition should be reduced. Absenteeism,
union problems, inefficiencies should be addressed at the grass root levels. Using human
psychology to improve efficiencies has been very beneficial in recent times.

Consumer psychology is another very important aspect. Understanding customers’ needs, wants
and desires is integral. Tools like market research, surveys, etc helps in determining which product
would be well received and which would not. Decisions to increase or decrease production,
decisions on distribution channels, sales promotion techniques all depends on the psychology of
the customers. Tactics used to influence customers could be influence and persuasion.
Understanding the psychology of the customers is the key to maximising profits of the company.
Companies also use consumer psychology to predict what kinds of products customers would want
in the future. Research and development is then conducted on these ideas and theories to make
products the customer wants.

Supplier psychology helps us negotiate for fair rates which in return affects the profits of the
organisation. It also helps us choose the right supplier according to our needs.

These are the major dimensions of the business which are influenced by psychology. Psychology
also plays a major role across departments from Human Resources to production to finance to
sales. All are influenced by the psychological requirements of the people involved.

In the Human Resources department, psychology is used to Fine-tune the hiring processes.
Appropriate measures are taken to curb attrition, increase employee retention, increase employee
productivity and loyalty using psychology as a factor. Deciding on appropriated employee review
methods and frequency is taken by keeping the psychology of the employees in mind. In the
Production department decisions like what to produce, how much to produce, how to produce,
where to produce depends on the psychology of the customers and the labour force. Ideal working
hours, wage rate are all determined using psychology as a guiding factor. In the Finance
department, identifying which costs can be controlled and minimised, investment decisions, the
incentives which can be offered, the pricing of the product are all made keeping in mind the psyche
of the people concerned. In the Advertising and Promotion departments, deciding which
advertisements would appeal to the customers, the duration of the advertisement, the target
audience, the timing of the advertisement, the medium used are all dependent on the organisation’s
perception of the consumers’ psychology. In the Sales and distribution department, deciding the
channels of distribution, the quantity of stock to be kept, the shops in which the stock is to be kept,
etc all depends on the consumers. Apart from all this, Innovation is completely based on
understanding the psychology of the markets. Trial and error methods are the order of the day, but
these need to be based on facts and opinions. Psychology helps us understand the models that
businesses before us have used and also helps us adapt the same to our innovations in these ever-
changing times in order to create business models which would make us successful. In short we
can learn from our predecessors and adapt their successes without suffering through their failures.
Importance of Psychology to Accounting as a discipline

As indicated above, psychology spreads across all borders and disciplines. In fact it affects the
daily activities of every living creature in different ways. Accounting like every other disciplines
involves a lot of reasoning and decision making which all depend on the cognitive functions of the
mind. From financial management to auditing, accountants are expected to perform series of tasks
with maximum focus and accuracy. Below are descriptions of basic accounting functions and the
roles played by psychology in their execution.

Numbers and Behaviors

When accountants and auditors enter into relationships with clients, an undercurrent develops
between the financial practitioner and client that involves dependency, trust and control. Initial
interactions, based solely on fiscal matters, become “subject to emotions, pressures, fears and
cognitive limitations,”. The evolution of the relationship between accountant and client morphs
from number cruncher to counselor, but if the accountant has no grounding in cognitive
psychology, the relationship that develops may not be as successful.

Auditing

When an auditor is hired to verify financial records, part of his/her job is looking for financial
irregularities. To probe possible cases of fraud or figure manipulation, auditors can be trained in
psychology so that their approach to examining books and forming independent conclusions
produces a more successful audit. Audits require accountants to balance human behavior with
financial transactions, and many of the newest theories and practices pairing audits as they relate
to psychological approaches are regularly published in the “Journal of Accounting Research.”
Standard research techniques used during these audits are observation, theory development,
background collection and hypothesis testing that often changes the accountant's role from figure
collector and analyst to independent investigative researcher, probing beyond the books.

Taxes

Understanding the personalities of folks for whom accountants do tax returns is another aspect of
psychology education that’s important, even for those who do nothing but prepare tax returns.
Knowing a client’s personality can help an accountant do his job more efficiently.
The Investors

One interesting demographic recognized within the accounting psychology field focuses on the
behaviors of investors. High-risk takers often give their accountants a particularly difficult time
because they tend to be overly confident, may lack self-control and often have a propensity for
“memory loss” following financial failures. Additionally, people falling into this category tend to
be reticent about disclosing the information an accountant needs to do her job, so the more training
in psychology an accountant receives, the better able she is to do her job and manage her client as
well.