Behavioural Science Approaches in Economic Research

Table of Contents

1. Introduction

2. The Behavioural Approach

3. Audit Paper
3.1 Summary
3.2 Behavioural Scientific Approach
3.3 Hypotheses Development, Applied Research Method and Findings
3.4 Critical Evaluation of Behavioural Approach

4. Sustainable Marketing Paper
4.1 Summary
4.2 Behavioural Scientific Approach
4.3 Applied Research Method and Findings
4.4 Critical Evaluation of Behavioural Approach

5. Critical Appraisal of Behavioural Approaches

6. Conclusion

References

1. Introduction

An undogmatic and liberal introduction to the discipline of business administration is not a matter of course. It appears that there is a solid knowledge base, as long as it is a matter of propaedeutics, accounting, cost accounting, financing or mathematical formulas and legislation (Kirsch, 1979). Differences in opinion on other relevant topics cannot be ignored (Kirsch, 1979). These differences become serious if fundamental principles are discussed (Kirsch, 1979). There is the need to clarify the main subject(s) of this discipline as well as its appropriate methods and tools that can be used to perform a scientific analysis (Kirsch, 1979). The most fundamental problem relates to the question from what perspective and with which methodological tools the subject(s) of business administration can be approached meaningfully (Kirsch, 1979).

The teaching system of Erich Gutenberg that was called later on the production-oriented approach gained acceptance in the years between 1950 and 1960 (Gutenberg, 1961). In the 1950s a dispute over methods occurred between Gutenberg and Mellerowicz (Gutenberg, 1961). That dispute raised the question whether it would be more appropriate to develop a business theory which would serve the purpose of knowledge, or to conduct business research with the aim to develop procedures that could be used in practice to realise business objectives (Gutenberg, 1961). In addition, the dispute leads to a rapid publicity of Gutenberg's provided methods. Thus, research focused on Gutenberg's methods. Thereby the focus was geared to production and cost theory, sales policy instruments, investment and financing as well as the relationship between the type of business and the predominant economic order (Kirsch, 1979). The publication and rapid dissemination of Gutenberg's teaching system dispelled the doubts about the scientific character of business administration (Kirsch, 1979).

Generally speaking, science is characterised by four properties. The first property is characterised by the question of truthfulness as well as the search for answers and, therefore, the pursuit of recognition (Kirsch, 1979). Thus, the goal of business theory is solely recognition, whereas the management policy in its various sub-areas serves to design business facts for the realisation of certain goals based on the knowledge derived from recognition (Kirsch, 1979). Secondly, science is characterised by the constitution of a recognition object as well as recognition goals (Kirsch, 1979). Thus, this distinguishes scientific disciplines among one another. The objective of capturing the recognition object is a dynamic process without finite limitation due to constant changes in the field of business administration based on both advancing technology and new organisational structures as well as changes in the behaviour of employees or customers on the markets which leads to decision-making problems and changing execution strategies (Kirsch, 1979). Thirdly, science applies specific research methods to derive knowledge (Kirsch, 1979). Finally, science endeavours to secure all judgements about the object of recognition in its truthfulness and order them systematically (scientific system).

This coursework aims to present behavioural science approaches as part of the research programmes course. The coursework places greater emphasis on the research discipline of sustainable marketing and audit. The detailed presentation of the overall behavioural approach with its numerous junctions is presented right after the introduction, which is part of the second section. Sections three and four outlines a brief summary, an analysis of the behavioural scientific approach, the applied r esearch method and findings as well as a critical evaluation of the performed behavioural approach of both the sustainable marketing and audit paper. Section five aggregate the critical appraisal of both behavioural science approaches that are given in section three and four and place them into relationship to the overall behavioural approach. Finally, section six contains the conclusion.

2. The Behavioural Approach

The basic assumption of rational decision-making behaviour in companies is considered as unrealistic according to the behaviour-scientific approaches (Kirsch, 1979; Wandt & Mau, 2013). The findings of behaviour sciences, such as psychology and sociology aim to help explaining the actual decision-making behaviour of people in companies and markets (Kirsch, 1979). Based on this, recommendations for actions are derived (Kirsch, 1979). The significance of this approach is demonstrated, among other things, in marketing by its inclusion of consumer behaviour as well as in organisation theory analysing leadership and motivation issues (Kirsch, 1979). The behaviour-scientific approach is remotely similar to Anglo Saxon management theory due to the fact that it is also geared towards solving management issues(Kirsch, 1979).

The fundamental critique of the representatives of the behavioural-scientific approach in the area of business administration is the overall assumption of the rational behaviour of the homo economicus (Elschen, 1982). They state that this is an unrealistic assumption (Elschen, 1982). These representatives state to examine psychological, sociological and socio-psychological pattern to be able to draw inferences and predict general behaviour in companies and markets (Elschen, 1982). In addition, those pattern support to infer recommendations for action (Elschen, 1982). However, there are existing disagreements between the representatives of the behavioural-scientific approach on the questions whether the adoption of general (social) psychological theories should be strived for the development of theories about business behaviour or the development of an independent economic behavioural research (Elschen, 1982).

Apart from the inclusion of behavioural-scientific elements in the decision-oriented business studies, the behaviour-oriented sales theory and behaviour-oriented organisation theory have been developed. The behaviour-oriented sales theory aims to explain the emergence and the effect of sales policy measures by using behavioural categories (Kroeber-Riel, 1974). Based on this, it is possible to develop techniques to control human behaviour in a business context (Kroeber-Riel, 1974). Consequently, this should increase the accuracy and certainty of sales forecasts and improve the optimisation of sales policies (Kroeber-Riel, 1974). For this purpose, empirical studies are performed to determine market reactions based on the behaviour of suppliers and customers (Kroeber-Riel, 1974). The object of investigation of the behaviour-oriented sales theory is equally the behaviour of the offering company, its competitors as well as its demanders (Kroeber-Riel, 1974). However, the behaviour-oriented sales theory restricts itself to a great extent to the examination of the consumer behaviour (Kroeber-Riel, 1974). A distinction is made between different behaviours of customers purchasing decisions, such as rational behaviour, habitual behaviour, impulsive behaviour as well as social dependent behaviour(Meffert, 1986). The object of purchase and its specific characteristics determines the underlying behaviour of a purchase decision (Meffert, 1986). The behaviour of an individual is explained by a function of a person’s characteristics (c) and the environment (e) (Meffert, 1986). On the one hand side, a psychological explanatory approach derives the behaviour of a person based on its characteristics and on the other hand, a sociological explanatory approach derives the behaviour of a person based on its environmental situation (Meffert, 1986).

The behaviour-oriented organisational theory, also referred to as organisational behaviour, designates an interdisciplinary field of research dedicated to the analysis of individuals, groups and organisations (Kirsch, 1979). The focus is basically on human behaviour in interaction with various internal and external organisational influences (Kirsch, 1979). The focus in research is set at one of three levels (Kirsch, 1979). First, at the individual level, organisational behaviour examines, for example, how human behaviour is dependent on individual perception, thinking processes as well as emotions (Meffert, 1986). Research focuses on the differences between individuals with regard to, among other things, their values, resilience and commitment (Meffert, 1986). Secondly, at the team level, the organisational behaviour approach considers the dynamics in groups, such as teams and departments (Meffert, 1986). Here, research focuses particular on team building, leadership approaches as well as the cooperation within and between teams (Meffert, 1986). The third and last level of organisational behaviour analyses the interaction of human behaviour with organisational activities, processes and structures (Meffert, 1986). The focus is, among other things, on the development of entrepreneurial strategies to support desired outcomes, such as individual creativity or organisational performance (Meffert, 1986). Furthermore, liking these levels yields in interesting approaches, such as multi or cross-level models (Meffert, 1986).

3. Audit Paper

3.1 Summary

The paper Offsetting Misstatements: The Effect of Misstatement Disruption, Quantitative Materiality, and Client Pressure on Auditors Judgements analyses two hypotheses regarding the influence of materiality and client pressure on auditors’ judgement of two misstatements detected within the scope of an audit which have offsetting implications on the client’s income (Messier & Schmidt, 2018). Corporate management and the auditing standards are ambiguous about the way auditors should handle offsetting misstatements (Messier & Schmidt, 2018). Therefore, 143 participators from three Big Four and four Next Ten public accounting companies in Germany participated in the main experiment (Messier & Schmidt, 2018).

All participants, who are experienced German auditors worked on a case that simulate different misstatement distributions on the same or diverse accounts, existent or inexistent client pressure as well as quantitative measured misstatements incorporated in the condition of client pressure (Messier & Schmidt, 2018). The quantitative measured misstatement is illustrated as the net amount lower than performance materiality or higher than performance materiality (Messier & Schmidt, 2018).

First of all, the findings prove the assumption that offsetting misstatements accounted in two different accounts interact with client pressure (Messier & Schmidt, 2018). The findings illustrate that the adjustment ratio of offsetting misstatements that occur in two separate accounts peaks when auditor’s face no client pressure (Messier & Schmidt, 2018). In addition, findings indicate that quantitative materiality interact with the distribution of misstatements (Messier & Schmidt, 2018). Once the amount of materiality is higher than the performance materiality and the distribution of misstatements is located in different accounts, the percentage of auditors who refuse the bonus when facing client pressure peaks (Messier & Schmidt, 2018). Finally, the judgement of auditors seems to be dependent on an auditor’s experience (Messier & Schmidt, 2018). The misstatements are fully adjusted if there is no existing client pressure and the auditor has more experience (Messier & Schmidt, 2018). However, auditors tend to exempt the adjustment of misstatements if they are dealing with client pressure (Messier & Schmidt, 2018).

3.2 Behavioural Scientific Approach

Introduction to Motivated Reasoning

Motivated reasoning or motivated cognition as a psychological school of thought is associated with cognitive bias (Kunda, 1990). It describes the connection and reciprocal influence of motivation and cognition (Kunda, 1990). Whenever an individual prefers a certain outcome, its process of thought is guided unnoticed by systematic errors in retrieving, constructing and evaluating information (Kunda, 1990). Motivation, that is defined as a preferred outcome, affects the cognition, which is defined as the process of thought, of human beings (Kunda, 1990).

However, humans usually assume to have an objective and rational process of thoughts, although they are directed by subjective preferences and desires (Kunda, 1990). Therefore, this type of irrationality is called the illusion of objectivity in the context of motivated reasoning or motivated cognition (Kunda, 1990).

Motivation describes the disposition to spend time and energy to achieve a certain goal (Kunda, 1990). A distinction is made between intrinsic and extrinsic motivation (Kunda, 1990). Intrinsic motivation depicts the desire to act to fulfil its inner need, for example due to an interest in a certain topic (Kunda, 1990). However, extrinsic motivation describes the desire to act due to external incentives, such as a reward (Kunda, 1990).

Cognition depicts all processes and functions that enable intelligent and targeted actions. In particular, this include remembering, perception, attention, problem solving as well as judgement (Kunda, 1990).

Motivation: Accuracy versus Individual Preference

The process of thinking, such as remembering and processing new information might be influenced by various motives. There is a motive of accuracy (Kunda, 1990). That motive takes action if a certain outcome is favoured based on an underlying process of thinking (Kunda, 1990). Therefore, high cognitive effort and careful information processing is required, that assume a systematic analysis of information (Kunda, 1990). The motive of accuracy leads to a minimisation of cognitive bias (Kunda, 1990). The directional motive might become effective, which refers to wishes, needs and preferences that affect the outcome of a process of thought (Kunda, 1990). Once this motive is activated, the process of thought is directed into a certain direction which, therefore, yields to a desired outcome with a higher probability (Kunda, 1990).

Confirmation Bias

Humans are usually convinced to examine the condition of reality rationally. However, they often confirm reality which they are already convinced of (Kunda, 1990). The process of thinking with a directional motive is generally unconscious and unintentional. Targeted introspection leads to desired results. Introspection signifies the search for suitable information in the memory. In order to maintain a positive self-image, humans tend to remember own successes rather than failures, among other things.

It is possible that only certain units of knowledge are combined in the human’s memory when processing information, which support the desired conclusions (Kunda, 1990). This is explained by the following example. Let us assume, that someone wants to buy a new mobile phone and, therefore, he/she starts to evaluate various options even though he/she already has a preference for a particular manufacturer, before purchasing a good. Consequently, external factors/information are derived from the environment that confirm the preferred outcome as well as information which can be used as a justification against alternative outcomes or solutions (Heinen, 1969; Bellinger, 1988). The tendency to gather and prioritise information that strengthen own convictions and reject those which refute them is called confirmation bias (Kunda, 1990).

The purpose of cognitive bias is to maintain a stable self-image (Kunda, 1990). Therefore, it prevents to scrutinise information with regard to accuracy and credibility which correspond with humans’ values and attitudes (Kunda, 1990). This phenomenon occurs particularly with regard to socio-politically controversial issues, such as political ideologies (Kunda, 1990).

3.3 Hypotheses Development, Applied Research Method and Findings

Hypotheses Development

The coverage of both the accuracy goal and directional goal/motive is present in the context of audit (Messier & Schmidt, 2018). An essential objective of an auditor is to make sure that the financial statement is without any material misstatements. Thus, an unqualified audit opinion by an auditor is preferred, while a failed unqualified audit opinion has damaging effects on an auditor’s reputation (Messier & Schmidt, 2018). As a result, the auditor strives for the adjustment of all detected material misstatements.

Auditors and their business success depend on client’s future audit fees. That is why they tend to acquiesce to their demands. This dependency tends to result in client pressure to sustain the business relationship (Hatfield et al., 2011). Consequently, this client pressure leads to emerging and/or rising directional goals/motives. Audit literature demonstrate that the adjustment of detected misstatements decrease once client pressure emerges (Ng and Tan, 2007).

An auditor who wants to satisfy a directional goal/motive starts to bias its search for misstatements, valuation of the materiality as well as its interpretation of audit and accounting standards to reach the desired outcome (Messier & Schmidt, 2018).

Motivated reasoning is restricted by the individual’s capacity to generate justifications for a desired conclusion (Messier & Schmidt, 2018). Therefore, motivated reasoning is able to explain a certain favoured reporting outcome, whilst the identified misstatement allows for interpretation and judgement or is subjective in nature (Messier & Schmidt, 2018). The literature points out that subjective misstatements leads to lower required audit adjustments (Ruhnke & Schmidt, 2017; Braun, 2001).

First, client pressure and the distribution of offsetting misstatements interact to that extent that auditors tend to meet directional goals/motives if they experience client pressure (Messier & Schmidt, 2018). The prediction of auditor’s judgement who experience client pressure and detect misstatements within the same account are not biased, because the audit standards allow for a reasonable justification to meet directional goals/motives (Messier & Schmidt, 2018). The accuracy goal/motive that corresponds with no client pressure leads to the fact that auditors tend to draw the conclusion that it is consistent with the accuracy goal to adjust the misstatements detected in two different accounts (Messier & Schmidt, 2018). However, directional goals/motives that are linked to client pressure and predominant ambiguity of audit standards lead to acceptable justifications not to adjust detected misstatements (Messier & Schmidt, 2018). Consequently, it is unlikely that auditors force the client to adjust fully all detected misstatements if they want to fulfil a directional goal/motive that represent client pressure compared to the accuracy goal/motive (Messier & Schmidt, 2018). The following hypothesis was formulated:

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