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The Psychological Attraction Approach to Accounting and Disclosure Policy

David Hirshleifer and Siew Hong Teoh

MPRA Paper from University Library of Munich, Germany

Abstract: We offer here the psychological attraction approach to accounting and disclosure rules, regulation, and policy as a program for positive accounting research. We suggest that psychological forces have shaped and continue to shape rules and policies in two different ways. (1) Good Rules for Bad Users: rules and policies that provide information in a form that is useful for users who are subject to bias and cognitive processing constraints. (2) Bad Rules: superfluous or even pernicious rules and policies that result from psychological bias on the part of the ‘designers’ (managers, users, auditors, regulators, politicians, or voters). We offer some initial ideas about psychological sources of the use of historical costs, conservatism, aggregation, and a focus on downside outcomes in risk disclosures. We also suggest that psychological forces cause informal shifts in reporting and disclosure regulation and policy, which can exacerbate boom/bust patterns in financial markets.

Keywords: Investor psychology; accounting regulation; disclosure policy; salience; omission bias; scapegoating; limited attention; overconfidence; conservatism; loss aversion; accrual; smoothing; mental accounting; historical cost; risk disclosure; value-at-risk (search for similar items in EconPapers)
JEL-codes: G0 G28 G38 H10 K22 M4 M40 (search for similar items in EconPapers)
Date: 2009-03-11
New Economics Papers: this item is included in nep-acc and nep-cbe
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