Impact of Behavioral Sciences | Commerce & Accountancy Optional Notes for UPSC PDF Download

Meaning of Behavioral sciences 

• Behavioral science is the study of human behavior and how a person makes decisions in the real world. It explains how the emotions, social factors and environment affect the decision of human beings and may at times influence the person to take irrational decisions.
• For example, as given in Prospect theory which was developed by Daniel Kahneman and Amos Tversky in 1979 which explains that losses cause a greater emotional impact on an individual than does an equivalent amount of gain.
• Let us suppose, as an investor, you must invest your money in any one of the given companies.
  Company A – company is earning profit of 20% on their capital employed from the past 5 years. Company B – company was earlier earning higher profits but from the past 5 years it has been earning profits of only 20% on their capital employed.
  Maximum investors would opt for Company A even though the current situation of both the companies is the same (keeping other things constant). The reason for selecting Company A is that there is negative news in company B with respect to decline in profits from the last 5 years.

Impact of Behavioural Science on Accounting

•  Behavioral science tries to find how individuals make decisions and influence other individuals, organizations, markets, and society. 
• The behavioral aspect of accounting is that part of accounting that tries to develop an understanding of emotional elements of human behavior that influence the decision making process in accounting.
• Under behavioral accounting, we try to understand the impact of human behavior on budget preparation, auditing, decision making, and leadership. 
• Let's take an example where the behavior of a manager directly affects budgetary decisions. When the optimistic manager prepares a budget, he might overestimate the expected sales and plans to increase production. He will try to achieve economies of scale and ultimately reduce the price of the product. On the other hand when the pessimist manager prepares a budget, he might underestimate the expected sales, and to cover the cost, he will increase the price of the product. Thus, the behavior of the manager directly affects the business decisions. 
• It includes the study of the behavior of accountants or the behavior of non‐accountants as they are influenced by accounting information. It also studies how variations in information influence the behavior of people. For example, Managers with a higher administrative background emphasize performance evaluation and prefer to use financial information for the decision‐making process. By contrast, other managers tend to use nonfinancial information more than financial information in decision‐making.
• The other case of behavioral impact is the nature of the client that influences the judgment of the auditor. 
• For example, When the auditor has had positive experiences with the client in the past, his fraud‐risk assessments are lower and vice -versa. 
• The nature of reporting of Corporate Social Responsibility by the firms improved since society's perception about the firm changed based on their CSR reporting and contribution towards social behavior. It has also been found that the CSR activities tend to enhance the reputation of the firm. 
• The effects of behavioral factors on accounting are so noticeable and significant that this trend in accounting is said to be one of the most important in determining accounting paradigms in the future. 
• For example, including human resource accounting while preparing accounts.
• Human resource accounting is a process of reporting investments made in the human resources of an organization that are presently unaccounted for in the conventional accounting practice. It includes skills, knowledge and behavior of the employees in the organization.