The Psychological Attraction Approach to Accounting and Disclosure Policy

Much existing positive research on accounting rules and regulation focuses on the benefits of existing rules to rational users, or else to regulation as a result of the battle between rational competing interest groups. Such research has made important advances. However, psychological forces affect individual and group behavior in many contexts. So we argue that to capture important features of accounting, we must go beyond the assumption of perfect rationality. We introduce here the psychological attraction approach to accounting and disclosure rules, regulation, and policy, and suggest that it offers a program for positive accounting research. The psychological attraction approach holds that heuristics and biases in judgments and decisions have shaped and continue to shape accounting rules and policy. Existing research in behavioral economics and finance has studied the design of policies and regulation to help individuals who are subject to psychological bias make better decisions (see, e.g., Sunstein and Thaler 2003; Camerer, Issacharoff, Loewenstein, O’Donoghue, and Rabin 2003). A further nascent direction explores how psychological bias of political participants causes dysfunctional financial regulation (Hirshleifer 2008; Daniel, Hirshleifer, and Teoh 2002). We propose that psychology shapes accounting rules and policy in two very different ways.