Evidence order and belief revision in management accounting decisions

One of the primary functions of management accounting is to provide inputs for management decisions. These inputs, or pieces of evidence, are used in making judgements about an organization's activities. We focus on situations in which an individual's degree of belief in a specific cause, or hypothesis, is sequentially revised as additional evidence is received. These types of situations are numerous in management accounting contexts (e.g. performance evaluation, variance analysis, and resource allocation). Effects of evidence order and currently held beliefs (anchors) on judgements and decisions are investigated using Hogarth & Einhorn's belief-adjustment model (Order Effects in Belief Updating: The Belief-Adjustment Model, Working paper, 1990). Business students taking a management accounting course processed eight cases, four “generic” (i.e. nonaccounting) and four “management accounting”. Model predictions were supported for both groups: recency effects were present for mixed evidence; anchor size did not affect the magnitude of the recency effect; and anchor size had the predicted impact on changes in belif. For generic cases, as predicted. no order effect existed for consistent evidence. For accounting cases, some recency effects were found for consistent evidence, whereas the model predicts none. Mixed evidence order effects (i.e. recency) did not consistently impact action-oriented decisions in either generic or accounting cases. Prior research is reinterpreted in light of these findings. Implications of these findings for developing descriptive models of accounting judgements and decisions, as well as applications within management accounting contextsm are discussed.