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A new pilot study has been looking at how neuroscience can be used to understand how business decisions are arrived at, and the role it can play in management accountancy by evaluating the decision-making process and the role that emotional responses play their part in this

It may sound incredible to management accountants, but we are on the brink of a revolution in the science of economics and business.

While economics and business are beginning to recognise the advantages that neuroscientific evidence brings to understanding the behaviour of people in firms and markets, our pilot study into the management accounting prospects of neuroscience indicates that its potential contribution to management accounting knowledge could be huge.

Management accounting seeks to understand decision-making, to estimate the future and evaluate the past.

As management accountants we are increasingly aware of the effects that financial incentives have on information processing, decision-making, estimating and evaluating processes.

Psychology is making swift steps towards becoming a harder science, and economics and psychology increasingly seem to agree on central concepts, such as “rational” and “irrational decision-making”.

This recent behavioural shift in the orientation of management accounting into the field of neuroscientific inquiry may lead to new and applicable knowledge about the role of management accounting and management accountants in organisations.

Neuroscience is the field of science that investigates which brain regions are responsible for specific functions of animals and humans, and how connections between brain regions affect behaviour.

While focusing on various functions in the field of physical movements, but also on intangible functions such as memory and cognition, the role of neuroscience in human decision-making seems especially interesting for management accounting.

Neuroeconomics, combining neuroscience, behavioural economics and psychology, draws on techniques of imaging brain activity during an economic task to explain the role that neural subsystems play in economic behaviour.

Methodical advancements in this field allow researchers to open up what has thus far been considered a “black box”.

While much remains to discover, the joint research efforts of economists, psychologists and neuroscientists have resulted in the discovery of brain areas that are activated for conscious decision-making, coping with risk and uncertainty, inter-temporal choice, and reward and punishment.

So what are the potential consequences for management accounting practice?

Neuroscientific research on decision-making has led to the discovery of two major decision-making areas in the brain.

One is responsible for cognitive (i.e. rational) processes, while the other appears to be associated with the emotional aspects of decision-making.

For management accountants, as guardians of rational decision-making in organisations, it is important to establish the interplay between these systems.

Not only does such knowledge allow a more fundamental understanding of the origins of, and barriers to, “irrational” decision-making, but understanding how emotions may dominate cognition has important consequences for the way in which we design and use management accounting systems.

It is therefore important to learn how the way in which we present our “objective” facts to support decision-making may in fact lead to emotions, rather than cognitive reaction.

Neuroscience may explain why management accountants often have the feeling that their reports function as ex-post rationalisations of decisions already taken, rather than ex-ante decision-support material.

In business we regularly have to consider what level of risk is acceptable to the organisation. Management control systems typically assume that people adhere to some rational decision rules and are able to estimate the probabilities and values of future outcomes.

Pre-neuro behavioural studies have shown that this is most often not the case. Moreover, the way in which alternatives to a decision are presented to people affects their opinion about them and their choice between them.

Behavioural economics shows that if alternatives are framed as gains, decision-makers usually opt for safer options, thereby exhibiting risk-averse behaviour, but they reverse their choice when alternatives are framed as losses.

Management accountants need to consider what kind of presentation of information may reduce hidden fear and anxiety.

Risk is an important factor, but not the sole one, in decision-making. Management accountants need to provide management with overviews of the inter-temporal consequences of managerial decisions.

The recent financial crisis has amply illustrated the need for more forward-looking information.

Based on our current understanding of human behaviour, this appears to be almost impossible to achieve. People simply have such a strong preference for sooner rather than later (positive) outcomes that it appears to be hard to change that.

On the other hand, people barely make a difference between two outcomes that lie in the distant future.

Neuroscientific research may provide a starting point in the analysis and solution of this problem, as its results suggest that humans’ preference for short-term outcomes is the consequence of the emotional system’s strong response to immediate, rather than to delayed, rewards.

This shows that the design of performance-related pay systems, based on delayed rewards, may affect human behaviour in desirable ways by reducing the impact of emotions on behaviour.

Lastly, people interact with other people in business decision-making. Fairness, trust and other social aspects of interactions not covered by standard economic frameworks are phenomena that are addressed by neuroeconomics, and are of great interest to management accountants.

Neuroscientific evidence shows that people reject unfair offers, even though this violates their best economic interests.

This suggests that emotional processes greatly interfere with cognitive decision-making.

In management accounting, given its rich practical and theoretical orientation, such issues find an easier place than in disciplines that have more singular approaches.

When applying neuroscientific methods for fundamental or applied research, management accountants have to deal with at least four challenges.

First, neuroscience requires a mastery of observation techniques that are not the normal repertoire of social researchers.

Rather than using behavioural observations, available accounting data, or perceptual survey scales, observing brain functions implies using brain imaging techniques that come in many forms, with associated strengths and weaknesses.

Techniques such as electroencephalography (looking at electric activity at the scalp level), or functional magnetic resonance imaging (observing blood oxygen levels by magnetic variation), require stylised and controlled settings to study human responses to stimuli.

This forces both researchers and practitioners to consider research questions and designs that are more specific than those often dominating management accounting research today.

Second, given the technological complexities of neuroscientific research, it is crucial to develop cooperation in multidisciplinary teams consisting of neurologists, economists and psychologists, as well as management accountants.

The ability to directly observe brain activity does not lead to straightforward implications for our field. From a purely neurological perspective, there is no such thing as a “reward area” or a “risk area” in the brain that is active, rather our own projection given the activity that we observe in certain areas in reaction to certain obvious “rewards” or certain “risk”.

But the potential pay-offs will be large if we are able to collaborate between neurologists and management accounting researchers in not only observing, but also interpreting and understanding brain activity.

Management accounting is one of the most complex areas of business, as it aims to solve a multitude of decision problems, balancing short- and long-term objectives under high levels of environmental and task uncertainty, and involving various organisational participants that have different interests and intentions.

In this way, management accounting seems to be the area where we can profit by learning the most fundamental drivers of human action in complex settings.

We believe it would be wrong to continue building our management accounting theories and practices on increasingly sloppy grounds of traditional approaches to understanding human behaviour, when the underlying disciplines of economics, psychology and even sociology are re-establishing the firm roots of their paradigms.

By Frank Hartmann and Stephan Kramer, both from RSM Erasmus University Rotterdam; Conrado Bosman, University of Amsterdam; Sergeja Slapniˇcar, University of Ljubljana; and Dalla Via, N, Ca’ Foscari University of Venice

Photograph: Getty Images


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