Accounting, Organizations and Society, Vol. 2, No.3, p. 245-268. Pergamon Press, 1977. Printed in Great Britain. HUMAN INFORMATION PROCESSING RESEARCH IN ACCOUNTING: THE STATE OF THE ART* ROBERT LIBBYt Univertiy of Crosse and BARRY L. LEWIS ‘The Pennsylvania State University ‘Abstract ‘Accountants’ interest in decision making is resulting ina growing body of research based upon thearies tnd models from the psychology of information processing. This paper presents a clasiicaion of Information procesting variblee which have been studied by peychologiste which tomer as framework for organizing information processing research in accounting. It then reviews and evaluates the existing accounting literature based upon three research approaches: the lens model, probabilistic Judgment, ‘Accountants’ interest in decision making is derived from two sources. First, our traditional user- ‘orientation implies 2 goal of improving decisions which are based upon accounting intormation. This goal may be achieved by improving the information set and/or increasing the ability of decision makers to use the information. Secondly, we also serve as decisions makers in the choice and evaluation of information in accounting policy, auditing, advisory, and managerial situations. Improving the quality of these decisions requires an understanding of the underlying processes which affect decision performance. Most behavioral research in accounting has been aimed at promoting this understanding, In general, hhowever, this line of rescarch has not realized potential due to the lack of « coordinated resear effort which has resulted in a lack of generality of conclusions. Various inquiries have been directed at specific problems which could be more fully examined st more conceptual levels. A framework is necessary to encourage behavioral researchers in accounting to (1) abstract from the specific practical problems to the underlying generic issue cognitive tyle. Finally, directions for future recearch inthis area are eugeected. and (2) search other disciplines which have studied the issue for relevant theory, methodo- logy, and evidence in analogous situations. ‘The most recent and, we believe, the most significant exception to this trend is the development of the body of reeearch based upon theories and models from human information processing (HIP) psychology. What distinguishes this new and growing literature most from previous attempts to study the use of accounting information ie. ite strong. grounding in research approaches and evidence developed by psycho- logists in situations closely related to those of interest to accountants. In turn, much of this psychological research is firmly grounded in normative decision theory and statistics, The purpose of this paper is to systematically review this area of accounting research, to assess its major implications, and to provide guidance for future research. The paper is organized in three parts. First, we present a general classification of the generic information processing variables studied by psychologists. This classification serves, as a method of organizing the existing HIP ‘An eailier version ofthis paper was presented at the 1976 Annual Mestng of the American Accounting Assocation, Atlanta, Georpa This project was completed while Mr. Libby was Coopers and Lybrand Accounting Research Fellow at the 24s University oF Cascago.246 accounting litevatwre and as a tool in future research Tor abstracting accounting issues to underiving generic information processing issues, Secondly, existing HIP accounting studies based upon three specific approaches are reviewed. In Us section, the variables fiom ie classification which have’ received attention are identified and the major implications of the existing studies are discussed. In the final section, accountants’ uses of the three approaches are evaluated and suggestions fur duuges ain ealensions uf tis approstlis ate made CLASSIFICATION OF INFORMATION PROCESSING VARIABLES The most simple information processing models separate three components: input, process, and output. The input component is the information Set Or cue set which is then combined ot processed by a judge or decision maker, which produces the ‘output normally in the form of a judgment, prediction, or decision. Variables of interest to in- formation processing researchers can be catagorized lunder each of these three components. Figure 1 contains listing of information processing variables which are categorized in such a fashion Each has received detailed attention in the psychological literature on human information processing. Becker & McClintock (1967); Lee (4971); Slovic & Lichtenstein (1971); Rapoport & Wallsten (1972); Brehmer (1976); and Slovie, Fischhoff & Lichtenstein (forthcoming) provide reviews of this literature.” Slovic (1972) reviews this literature from a financial viewpoint. Studies of the information set (input) attempt to determine which charasteristice of the cet and the decision , context affect the way decision makers use information. Five factors describing the information set are presented: sealing charac- teristics of the individual cues, statistical proper- tise of the information cet, information content or the relationship of the cue set to a criterion, method of presentation, and context. Researchers studying the decision process attempt to describe the way in which decision makers combine information in the formation of judgments and investigate the impact of characteristics of the ROBERT LIBBY and BARRY L. LEWIS, judge on use of information, The numerous characteristics receiving attention are delineated in the classification. Variables relating to the decision output deal either with the quality of resulting judgments or the decision maker's self'nsight or perceptions of his own decisions, Many of the variables presented in Fig. 1 have been studied by behavioral accounting researchers with or without their recognition of the relationship of their work to HIP psychology. ‘Must bellavioral accounting studies. Investigate (1) the impact of some of the listed information set variables upon the jndge or his. decisions, (2) the effect of differences between judges on the quality of judgment, and/or (3) the description of the present characteristics ot the judge, is decision rule, and the quality of his decisions. For example. a stndy of the affect of level of aggregation of internal financial information on decision quality may be looked at as not only the study of the impact of recombination of data, but of the number, dimensionality, information content, and interrelationships of cues on some measure of decision quality. The decomposition of this problem into the generic underlying issues first mdicates the complexity ot the aggregation issue. It then directs the researcher to define different levels of financial statement aggregation in terms of these variables and to search for theory and evidence suggesting their impact. This search would reveal many relevant findings in the ‘multiple cue probability learning (MCPL) litera- ture, For example, researchers have found that addition of irrelevant cues tends to decrease performance, addition of highly correlated cues Tesults in overweighting of the correlated cues, and generally increasing the number of cues inhibits learning, Finally, the psychologists’ experience in structuring decision problems for study can provide guidance in experimental design. In the same fashion, the question of how auditors make overall internal control evaluations may be looked at as a descriptive study of cue usage and the form of the decision rule. Researchers interested in this problem would be referred to the extensive multiple cue utilization literature. In this literature, psychologists have found that, in most cases, a linear-additive model captures the essence of a compensatory decision "These papers review the subpart of human information procsssing research which hs coosived the greatest attention by accountants. This subarea is often caled behavioral decision theory. Human information process so includes research areas such as concept formation, psycholinguistics, and problem solving which are beYond the scope of this paperHUMAN INFORMATION PROCESSING RESEARCH IN ACCOUNTING 247 on tnferasion set Judge Gestion mater 1, pte Prttrimetecteten A. Scaling cnaracertactes of utge Curacertetice A; quatlen of he Satpant etleet Cee 1 hamaeNechnteat SMacesray (enitiey) ANNES Stamremene (nntea, EO Mater of fetaee Efe eee 2 oe cherie We 2 setctatene nage ocsghei Fig. 1. Gssification of Information rule (where positive values on one aspect, compensate for negative values on another). Such a decision rule is consistent with the conceptuali- zation of internal control evaluation as a process of combining mumerous positive and negative attributes listed on internal control questionnaires. These same psychologists have found that analysis-of-variance and Bayes’ theorem provide a useful method of structuring experiments and measuring cue utiliestion in compensatory deci- sion rules. Previous use of these methods would provide guidance to the accountant in desien of his ‘own experiments, APPROACHES AND EXISTING RESEARCH This review limits itself to studies of informa- iow processing Uchavivr it accuuiting LonKeAts based upon three research approaches found highly useful by HIP psychologists. While all three approaches were designed to investigate how information is combined into a decision, each considers decision behavior in a different frame- work and emphasizes different variables from the above general classification. The three approaches considered are: (1) lens model, (2) probabilistic judgment, and (3) cognitive style. These approaches have received a great deal of recent attention by psychologists, accountants, and thers interested in the ety af decision behavior To our knowledge, the first attempt to apply these approaches to accounting problems was made by the psychologist Slovic (1969) in his study of two novice stockbrokers. This was followed by three papers by accountants: Rarefield (1972); Diekhatt (1973); and Mock, Estrin & Vasathelyi (1972) using each of the three approaches. Although vue! areas of human information processing maya8 be directly relevant to accounting (see note 1), studies based on other approaches and behavioral accounting reovarch with no. oxpl information processing psychology will be omitted from the review. Criticism of the individual studies is beyond the scope of this paper and can often be found in the correspondence section of subsequent issues of journals or as published discussions in proceedings. For each of the three approaches, the basic characteristics of the approach will be discussed, the existing studies conducted in accounting contexts will be reviewed, and the implications of the esearch for informetion processing psychology and for accounting policy- ‘makers will be discussed. Our generalizations from the laboratory to questions of accounting policy, of course, must be qualified by the usual llniulues’ it yeuevalieing um experimental studies to the real world, eeio in Lens model approach Brunswik’s lens model (see Brunswik, 1952, 1956) as adapted by information processing researchers such as Dudycha & Naylor (1966) is useful in. analyzing judgmental situations where hhumans make decisions or predictions based on set of explicit cues or pieces of information from the environment which are probabilistically related to a relevant environmental event or criterion. In the model, regression equations and correlation statistics are used to describe the relationships between the criterion and the information set (predictive significance), the information set and the subject response (cue usage), and. the subject response and criterion (response accuracy)? These statistics are related in the lens model equation (Tucker, 1964). Ashton (1974) and Libby (U975a) provide detailed descriptions of the model and its possible applications in accounting Within the lens model approach, decision makers evaluate a large number of cases based ‘upon the same set of cues. When the cues take on categorical values, analysis of variance (ANOVA) is normally used to model the judge's decision process. When the cues are continuous, regression or discriminant analysis is used to model the process or the continuous cues may be converted to categorical values and ANOVA may be employed. In both cases, the judgment is the dependent variable and the cues are the indepen- ROBERT LIBBY and BARRY L. LEWIS. dent variables in the model, These models simply provide a functional relationship between the cues ind “real” processes. Within the context of our clasifcation presented in Fig. 1, this approach is particularly useful in studying the impact of information set variables on decision cule form, stability or learning, cue usage, and decision accuracy, reliability, and predictability or in descriptive studies “of these variables. This method of modeling judgment provides a compromise between the overly simplified appioacl of asking subjects to describe the weights they place on information and the more complex and expensive process tracing models that have been used in the stuay of judgment. However, outside of the contents of Mighly suwtued tsha, I usefulness is limited. But even in these situations, the model provides a useful conceptual and pedogogical tool. ‘The results of psychological research using the Jens model approach have generally indicated that ‘many expert Judges such a8 clinical psychologists, radiologists, and stockbrokers. make judgments that are consistent aver time, but indicate little consensus among judges; that such judgments can be easily predicted with simple linear models but are not very accurate; and that the judgments can be affected greatly” by such information set variables as number of cues, type of feedback, and cue intercortelations. Aso, numerous decision aids have been developed based upon this research. jonzee and do not nocestarily represent ANOVA studies. When using ANOVA to model information processing, each cue is considered to be a factor which is partitioned into a few discrete levels. Hypothetical cases are then developed using completely crossed or tractional replication designs. As hypothetical cases are used, decision accuracy cannot be assessed. This is a particularly powerful tool for measuring cue usage because the percentage of judgment variance accounted for by each cue and interaction of cues can be measured, ‘A complete description of the technique and an application to radiologists’ gastric ulcer diagnoses is presented in Hoffman, Slovic & Rorer (1968). ‘ANOVA has been used in accounting contexts to measure the present state of cue usage, decision rule form, and decision consistency and consensus ‘of stockbrokers’ and auditors’ judgments in a total ‘upon whe eae properties of the variables und the appropriateness ofthe Implicit oss function In ine measureHUMAN INFORMATION PROCESSING RESEARCH IN ACCOUNTING. of five studies. Slovic (1969) and Slovic, Fleissner & Bauman (1972) examined stockbrokers’ judg- mente of the likelihood that the price of 3 ‘company’s stock would increase. In the Slovic (1969) research, two young stockbrokers analyzed 2 set of 128 hypothetical companies represented by eleven dichotomous financial factors normally available in Standard and Poor's reference reports including market derived and accounting informa- tion. The cue combinations were constructed according to a 1/16 fractional replication of a 2!" factorial ANOVA design. Each case was evaluated vn 4 nine-point “recommendation to buy” scale. ‘Agreement between brokers as measured by the correlation between their judgments was only 32. ‘The linear additive components (main effects) accounted for 71.7 and 179.9% of the total sponse variance of the two subjects, and interactions accounted for only 7 and 5% of total response variance ‘A substantial replication of the Slovie (1969) experiment was performed by Slovic, Fleissner & Bauman (1972). Thirteen stockbrokers and five MBA students participated in the study. The umber of financial factors presented was reduced to eight dichotomous factors, and 64 cases were constructed using a 1/4 fractional replication of @ 2" factorial ANOVA design. Evaluations were made on 2 nine-point capital appreciation scale with a time horizon of six to eighteen months. There was very little consensus between brokers. ‘Agreement was higher between the students than between the brokers. The weights attfbuted to the cues computed from the linear model revealed substantial individual differences. Main effects accounted for 50% of Broker 2's and 70% of Broker 10°s response variance, Interactions accounted for zero and 13% of the brokers’ response variance respectively. Subjects’ estimates of their cue usage hore little relation 10 the weights in the linear models measured by w?. On the average, earnings per share trend was the most important vanabie in the cue weighting schemes of both groups of subjects. Ashton (197da) and loyce (Forthcoming) used ANOVA to assess cue usage, decision rule form, subjective cue usage, and decision consistency and consensus of auditors’ judgments and decisions related to internal control. In Ashton’s (19742) study, 63 practicing auditors from four firms varying in size each judged the strength of 2 payroll internal control subsystem on a six point scale, Thirty-two cases represented by six 249 dichotomous indicators of internal control were presented to each subject. The cases were constructed using 2 1/2 fractional replication of a 2¢ factorial design. This was followed by a second administration of the experiment 6 to 13 weeks later. The auditors’ judgments were highly consistent over the petiod between the two administrations averaging r = 81, There was also considerable agreement or consensus between the auditors, The average cortelation between pairs of ‘auditors’ judgments was .70. Main effects accounted for over 80% of judgmental variance on Ue arctaye. Few intetactions we1e fous indival- ing that the intemal control factors did not eract in their effects on perceived quality of internal control. Two-thirds of the subjects made significant use of at least five of the six factors. The most important two factors in Uke subjects? decision models dealt with separation of duties. Other results reported by Ashton (1974c) suszest that the auditors had an extraordinarily high level of selfinsight into cue usage. Tn au attempt tw reconcile Ashuon’s (19743) findings of high degrees of consensus between auditors in intemal control judgments and other researchers’ reports of lack of consensus in sample selection behavior, Joyce (forthcoming) studied auditors’ consistency, consensus, cue usage, subjective cue usage, ‘and decision rule form in audit program planning. Thirty-five practicing auditors evaluated either 20 or 36 cases (including four repeat cases) by indicating how many hours ‘would be allocated to five categories of audit work related to accounts receivable. The cases differed fon three dichotomously defined internal contro! variables and two related accounting ratios and were constructed based upon a 1/2 replication of a 2 factorial design and 2 full replication of the Same factorial design in the experiments. The complete design was included to allow tests for interactions. ANOVA and MANOVA were used to model the subjects. ‘Joyce hypothesizes substantially lower inter- rater reliability than that reported by Ashton (0974) due to similar judgments of internal control quality being combined with dissimilar utilities for different types of audit work, Interrater rebabuity was much lower when meesured by the combined number of hours of audit work assigned to. the cases averaging only r= 31, Test-retest reliability averaged 63 with a median of .98. Similar studies in other contexts report lower test-retest reltabihty. In the models250 the linear additive components or main effects accounted on the average for 74.7% of the reliable judgment variance while interactions accounted for 3.3%. However, two judges heavily weighted interactive components. As in Ashton’s study, separation of functions was the most important variable in determining judgment. The MANOVA reoulte uggseted. thet como oubjects followed simplifying heuristics in allocating time to categories including keeping some items constant and applying constant ratios of time to two or more categories. The auditors overestimated the importance of minor cucs and underestimated the importance of major cues. This finding is consistent with the majority of previous research. All findings were similar to Ashton’s except for the hypothesized difference in consensus and lower selfinsight into decision rules, Hofstedt & Hughes (1977) studied factors affecting the disclosure decision in an experiment where 19 students acting as auditors evaluated losses from the write-off of an unconsolidated subsidiary it (cums of its probability of disclosure fon a scale of 0 to 100. Three materiality factors were varied systematically in a 3 X 3 X 3 factorial design. The size of the loss relative to operating income was mote important than the size relative to (otal investments in unconsolidated subsidiaties or to the book value of the subsidiary being written down. One interaction was significant for rine subjects. However, addition of this inter- action only increased average linear predictability from R?~.70 to .73. Significant individwal differences were noted in cue usage. The same self-insight biases noted in Joyce (forthcoming) were reported. Regression and discriminant analysis studies. When using ANOVA to model judgments, cues must he systematically varied within an experi: mental design. In studies using discriminant analysis and regression, actual cue values can be drawn from the envionment or cues can be simulated based upon any prespecified variance- covariance matrix. When actual cue values are used and criterion information is available, decision accuracy can be measured. This adds to the expenment the realism of actual relationships between cues and between the cues and criterion. ‘The wee of simulated cite allows one to ntilize realistic distributions or to study the effects of changes in the statistical properties of the information set. The techniques are particularly ROBERT LIBBY and BARRY L. LEWIS useful when accuracy is the decision variable of interest or when statistical properties and informa- tion content are the relevant information set variables. Unless uncorrelated cues are used, the technique is limited in its ability to measure individual cue usage. ‘The first accounting study to use regression or disoriminent analysis to model judgment vax Barefield’s (1972) study of the impact of aggregating or combining cost variances on process control judgments, He studied the impact of Presenting two separate cost variances or a combined cost variance in the judgment of whether labor was being used efficiently. He recognized that this accounting aggregation question really dealt with two separate issues: number of cues and the interrelationships or redundancy of cues. Doth of these issues had been studied in the multiple cue probability learning literature. The subjects were students who were ‘rained on 40 cases with feedback. They were presented with one of three information condi- tions. In wondition one, subjects were presented with 2 single aggregated variance. In the other two conditions, subjects were provided with two variances. These conditions differed in the level of ‘cue redundancy. Neither the number of cues nor redundaney Jud an overall significant effect on performance measured by the departure from “optimal” performance as determined by Bayes’ theorem. He utilized discriminant analysis. to ‘model the judgments and to estimate accuracy had Ue subjects been perfectly consistent. This allowed him to separate the effects ofthe selection of the wrong criterion from inconsistency. However, this separation also confounds. the effects of nonlinear cue usage with inconsistency. Boatsman & Robertson (1974) used discrimi- nant analysis to model 18 CPAs’ and 15 security analysts! materiality judgments. and to meacire and compare their cue usage, Based on simulated values of eight factors whose interrelationships matched the environment, each subject classified 30 cases into three disclosure categories: none, Footnote, line item. An aggregate discriminant model was built, The model predicted 63% of the three category classifications and 84% of all disclose-no disclose decisions. The percentage of net income factor accounted for 73% of the predictive power of the model. Whether or not the item of interest was a gain of loss on disposal of fixed assets as opposed to an accounting change or an uncertainty accounted for 247 of predictiveHUMAN INFORMATION PROCESSING RESEARCH IN ACCOUNTING power. Individual differences existed but their degree could not be accurately assessed as no interrater reliahility ctatitics were reported In addition, no difference was found between the ‘wo groups of subjects in cue usage. However, the lack of power of the statistical tests caused by small sample size may have produced this result. Libby (197Sa) proposed using mathematical models to simulate the effect of different accounting choices and errors on predictive performance. He developed three goodness of fit criteria based on signal detection theory and tested them for models of 43 loan officers’ predictions of business failure made from 70 five-ratio financial profiles (including 10 repeats). The five variables were developed by factor analyzing 14 ratios to remove redundancy. The cases were actual ‘businoae firme. The modele predicted 88% of the responses on average and were found to be stable over time and over subjects’ response thresholds. Libby (1975b) reported the accuracy, consistency, and consensus of the above loan officers in their task. They exhibited grester than random accuracy in their classifications averaging 74% correct. Mean consistency was 89%, and the loan officers agreed ‘wath each other 80% of the time on average. A composite judgment formed by combining all 43 judgments was almost as sccurats a2 the best individual judge. (The correlation between the ‘mean judgment and the criterion must be at least as large as the average correlation of the responses and criterion.) The loan officers’ predictions were more accursic and exhibited greater consensus than most judges previously studied. Two studies of the linear predictability, consensus, and accuracy of students’ predictions ‘of stock ‘prices made based on accounting and market indicators are reported by Wright (1977, 1975). In the first experiment, students predicted prices’ from five cues. Linea’ regression models ‘were used to predict subjects’ estimates of change in price and percentage price change. The linear iuvdels predicted the responses evetaging R~ 7 and .67 for the two responses. Subject accuracy was r= .16 and 20 on. the average for the two responses. Subjecis exhibited accurate linear and nonlinear use of the information as measured by the matching index (G) and the couelation between the nonlinear variance in the response and criterion (see Tucker, 1964). Little interiudee agreement was reported. Many. subjects also tended to overprice low priced stocks, In his second ‘Wight «0273 251 modeled 2 different group of students’ percentage price change decisions from four accounting and ‘market based cues. Similar analvses indicated similar results with more advanced students outperforming their less educated counterparts The meremental accuracy of the composite of all judges previously reported by Libby (1975b) was alsa in evidence Ashton (forthcoming) utilized regression to measure the effect of an accounting change on cue usage by student subjects. Change in cue usage was measured by comparing the ability of a regression model to predict later responses to cases where an accounting change had and had not been indicated. Presumably if subjects adjust their cue usage in’ response to a change, crosstemporal predictability would be reduced. The task involved the setting of product price based upon three cues. ‘The accounting change was from variable to full cost data. The change did result in a decline in predictability as hypothesized. One of two ‘moderating variables, whether the change increases ‘or decreases the importance of the dats, also had an effect. However, Libby (forthcoming) suggests ‘numerous confounding variables which also could have decreased predictability Decision aids. The use of a decision aid developed by HIP psychologists in accounting situations has been suggested by Ashton (1975). He suggests replacing men with their linear models in the performance of information combination tasks. Numerous studies in psychology have reported consistent improvement of decisions with this technique. However, Libby (19763) reports the first case where subjects outperform their models. In his loan officer study, subjects significantly outperformed their models. The interpretation of these results is debatable as indicated by additional remarks by Goldberg (1976), one of the originators of the technique, and Libby (1976b). The replacement of indivi- duals and interactive gioups with wnathenstival composites has received recent interest in account ing contexts by Wright (1976) and Libby & Blashfielé (1977). Wright found that equal weighted composites (the group's mean judgment) of @ Jaige number of judges actually outpesfurned the most accurate individual judge when the most accurate judge was chosen ‘based on an earlier sample of judgments. Libby & Blashfielé (1977) found that smaller composites containing only duce judges mgjviity of the produ theROBERT LIBBY and BARRY L. 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Davis (1969) and Einhorn, Hogarth, & Klempner (1977) discuss the uses and advantages of mean judgments in detail Summary. ‘The studies presented vary greatly in the type of decision maker, task, variables of interest, and modeling technique used. Table | presents a summary of this research. The variables studied reflect the attributes of the tools employed. Most studies were descnptive in nature reporting present levels of cue usage, decision rule form, accuracy, contittency, consensus, and predictability. Ashton (forthcoming) and Barefield (1972) are notable attempts to employ the methods to study the impact of changes in the information set. We believe that this is the most profitable dirootion for future reeearch by HIP accountants Numerous generalizations can be made from these results related to information processing issues and accounting policy issues. As in previous information processing studies, with few excep- tions, seemingly complex human decision pro ‘esses can be accurately predicted and cue usage estimated from simple linear models. Subjects have been able to produce predictions with greater than random accuracy from accounting data. Theit responses ate, for the most part, highly consistent over time. Differing levels of consensus have been reported which may be related to subject sophistication and commonality of experience, While normal biases in selfinsight were generally Teported, some pivups Uf subjevis pruduved extremely high levels. These same subjects also produce the highest degree of consensus. It seems that well-defined tasks with welldefined criteria performed by highly trained subjects produce the greatest. consensus and. selfinsight. Situations where such a combination of factors exist have received little attention by HIP psychologists. Four major issues of considerable interest to accounting policy makers have been examined by HIP accounting researchers utilizing the lens model approach. First, the determinants of materiality have recsived direct or indirect attention in three studies and the results of the studies are remarkably similar. Slovic e¢ al. (1972), Boatsman. & Robertson (1974), and Hofstedt & Hughes (0977) have studied’ the impact of different financial factors on_materiality decisions and ROBERT LIBBY and BARRY L. LEWIS. investment judgments of auditors, analysts, and stockbrokers. All three studies consistently indicate that the impact on net income is the most important factor in user decisions and in deciding whether an item is material. This would suggest that this tactor should receive the greatest attention of policy makers interested in setting materiality standards? Also, Boatsman & Robertson (1974) found that materiality limits for the disclosure of loss items were set lower than those for consistency or uncertainty items. Secondly, two studies have examined the factors affecting auditors’ intemal control judgments. Both studies consistently indicate that separation of duties is the most important factor atfecting these judgments. Differences in audit work time allocations seem to be due to differing utilities for difforent types of audit work, not from differing intemal control evaluation criteria, Four papers (Libby, 1975a, b and Wright, 1975, 1977) have indicated that’ subjects can make valid use of accounting data and that this behavior can be modeled. Finally, two papers have indicated that mathematical aggregation of individual judgments significantly improves average prediction accurecy., The usefulness of this approach in decision situations is being studied further by Libby & Dlashfield (1977) and Wright (1976). The approuch shows promise as d replacement for both individuals and interactive groups in some situations. Probabilistic jaigmnene ‘Another method used to study the utilization of information in decision making focuses on the ‘ways in. which individuals form subjective probability judgments. In this literature, informa- tion provessing is conceptualized as a sequential process where each cue is evaluated in tum resulting in a revision of the perceived probabilities of future events. The technique is particularly useful in assessing the impact of information set vtiables on cue’ usage and the deviations of responses from optimality: This line of research began in the psychology literature with early descriptive studies comparing individuals’ actual ‘behavior in the integration of prior probabilities aud niew information in the formation of posterior probabilities with the normative model of Bayes’ theorem. Peterson & Beach (1967) concluded ps an additional ution, it should be noted that generalizations from experimental work to the real world are large eps The importance of this point becomes even more clear when considered in the light of substantial contextual effects discused inthe last part of ths paper.HUMAN INFORMATION PROCESSING RESEARCH IN ACCOUNTING. early that individual Denavior was a good approximation of the normative model. Later research. however. led to the conclusion hy Slovie & Lichtenstein (1971) that the primary result of Bayesian research has been evidence of con- servatism in the revision of probabilities. These consistent findings led to the search for explana- tions of the deviations from the statistical model ‘Tversky & Kahneman (1974) initially identified three judgmental heuristics that decision makers employ due wo their imitations as processors of information. Accountants have used this paradigm to study the effect of statistical properties and ‘method of presentation of information sets, contextual effects, and characteristics of the decision maker on the quality of judgment as measured by the departure from optimality. Others have avamined actual and eubjective one usage and decision heuristics. The remainder of this section will be divided into discussions of accounting research employing the Bayesian model and research aimed at discovering the heuristics and biases employed in accounting contexts. Bayesian. In the Barefield (1972) study described above, the findings of the Bayesian literature were used to formulate the hypothesis that subjects would perform better with aggre sated data than with the sequential presentation of disaggregated data, The hypothesis was con- structed on the basis of prior psychological research studying the effect on conservatism of sequential presentation and of the number of dats items. Barefield found no overall significant effect cof aggregation but did note that subjects using disaggregated data were slightly less able to discern the optimal criterion (as determined by statistical decision theory) but were more consistent in applying their actual criteria than those subjects using the aggregated data Dickhaut (1973) used the average absolute difference between subjects’ probability estimates and the Dayesian probability estimate as the dependent measure in an experiment designed 10 consider the possible disadvantage of resolving the problem of choosing between altemative informa- tion systems by presenting both alternatives. At ‘the ame time, several variables that could affect the subjects” probability estimates were systemati- cally manipulated. In the experiment, subjects estimated the probability that an object is a ‘member of one of two mutually exclusive subsets. Estimates were based on a message which an 255 {information system associated with that object. ‘The experimenter manipulated the number of information systems, the setting. and the type of subjects. Drawing from the literature on. the concept of information reduction, Dickhaut hypothesized that subjects would perform better with 2 single information system than with a joint information system because the latter system requires a greater amount of information reduc- tion and hence is a more difficult task. Dickhaut also revewed research dealing with the ettect ot task familiarity on performance and research ‘examining the interaction of age and the ability to handle abstract concepts. As 2 result, Dickhaut hypothesized that undergraduate students would perform better in an abstract setting dealing with cubes and algebraic identities and that older businecemen would perform better in a butinest setting dealing with profits and stock market changes. The results indicated that the single information system did produce higher perfor. mance, but as hypothesized, the type of subject and experimental setting interacted in their effect ‘on performance and that task difficulty affected the interaction of subject and setting. The finding of numerous contextual effects and differences between types of subjects should suggest caution in the interpretation of studies aimed at choosing between alternative accounting information systems. Kennedy (1975) used Bayes’ theorem in a descriptive role to measure cue usage in loan officers’ predictions of bankruptey from four financial ratios. Twenty-four loan officers sequen- tially examined four financial ratios and total asset size for each of twelve companies, half of which had tater become bankrupt. Recognizing that the items of information were not statistically independent, Kennedy randomized the order of presentations within and across subjects. Prior probabilities of bankruptcy were elicited on the basis of industry classification only. After each piece of information, subfects gave revised estimates of the probability of bankruptcy. Using the ratio form of Bayes’ theorem, Kennedy computed the inferred likelihood ratio for each piece of information. The likelihood ratios were interpreted ay an index of data diagnosticity vs cue usage since they determine the degree to which the prior odds change upon receipt of the new information. This is quite similar, then, to the interpretation of regression coefficients) or w? weights in the fens mudel approach, Kennedy256 defined usefulness as a combination of magnitude of impact and accuracy of direction All ratios had a statistically significant impact The debe to equity ratio had the greatest positive effect on probability estimates and was U-shaped an that it showed high diagnosticity at extreme values. Although Kennedy emphasizes the measurement of usefulness, we believe that the key contribution of the experiment is the demonstration of the usefulness of Bayes’ theorem ‘in measuring cue usage. The technique also shows promise as a method of studying the impact of Information cot variables on cue usage, Uso of Bayesian research to develop decision aids will be discussed inthe final section, Heuristics and biases. Where the previously mentioned studies use Bayes’ theorem as a criterion of to measure cue usage, the studies of heuristics and biases suggest that humans react to their limited information processing capacity by using simplifying heuristics resulting in non- Bayesian probability estimates. Swieringa ef al (forthcoming) focus on the possible use of the representativeness heuristic in making judgments of subjective probability. Representativeness is described as the degree to which an event is judged to be similar in essential characteristics to its parent population or judged to be highly Tepresentative of the process from which it is generated. They replicate and extend six of the ‘Tversky and Kahneman experiments on the effects of priot probabilities, sample size, end inter correlation of input variables on the formation of subjective probabilities. Logically, all three of these factors should affect judgments of subjective probability, but due to the representativeness heuristic, Tversky and Kahneman have found diat these factors do not have the effect predicted by Bayes’ theorem, Swierings et al, extended Tversky and Kahneman’s work to a general business context and tested the generality of their results co alternative methods of posing questions in the experiments. Using students, they performed five experiments testing the effects of the predictive significance or diagnosticity of information, operationalized as prior probabilities and sample size, on judgments of likelihoods. A sixth experiment examined the effect of cue inter correlation and consistency. In general, the replications tended to confirm prior findings of reproentativeness. However, diere was siguiivant ROBERT LIBBY and BARRY L. LEWIS variation in the magnitude of the effect depending tupon how the questions were posed and the particular judgment context. These extensions suggest that representativeness may be a contin- gent rather than a general method of processing Information. Uecker & Kinney (1976) were the first to apply this research to a specific accounting problem, biases in the evaluation of sample results by auditors, They searched for the presence of one aspect of the representativeness heuristic, insens tivity to sample size, and the opposite behavior, insensitivity to error cate in auditors’ judgmental evaluations of random sample results. One hundred and twelve practicing CPAs participating in a state society continuing education program completed an audit case involving a test of complisnes of intemal control. They chose from ‘ach of five pairs of sample outcomes the sample result which provided the better evidence that at the 95% confidence level the population error rate isless than 5%, Subjects utilizing the _representativeness heuristic would choose the sample result showing the lower sample error rate regardless of sample size, To test for this heuristic, three of the five pairs were constructed such that the sample with the larger e1ior sate provided the better evidence cof compliance. Insensitivty to error rate would result in subjects’ choosing the larger sample size as long as the sample error rate is less than the actual rate of five percent. The other two pairs were designed such that the smaller sanuple sizes provided the better evidence of compliance to allow testing for this behavior. In all cases, the sample error rate was lower than the critical rate, The results showed that the CPAs out- performed subjects in similar prior research, responding correctly nearly 70% of the time. Only 9°CPAs consistently selected the lower error rate indicating consistent representativeness while 17 consistently selected the larger sample size. However, nearly 75% of the CPAs made at least one error and 56% made at lesst two errors. This indicates either a poor understanding ‘of basic statistical concepts or lack of interest in the experiment. Since few subjects consistently exhibited uke hypothesized heurstivs, modifica tions of the theory may be in order. The apparent interaction between sample size and sample error rate suggests a contingent processing model. However, a more sophisticated experimental design will be required (o clarify this issue.HUMAN INFORMATION PROCESSING RESEARCH IN ACCOUNTING In 4 non-accounting task Ronen (1971) searched for heuristics in subjects’ aggregration of joint probabilities. He studied whether decision makers would be indifferent between events with equal joint probabilities (expected value) but ‘which “had ‘aittenng sequences ot marginal probabilities. Ronen related the experiment to Gecision makers’ abilities to use probabilistic reports or to make capital budgeting decisions. In ‘a two-stage process, he hypothesized that, despite the fact that the ‘objective joint probability is identical for each action, subjects would choose ‘the sotion with the higher probability of firet-ctage success because of some form of discounting of probabilities. In two separate experiments, graduate students and management program participants chose between set A and set B where uch set consisted of two bagt of marbles, each containing certain proportions of two colors of marbles. The object was to pick set A or B such that one could sequentially pick a blue marble from the first bag and pick a red marble from the second bag. Probabilitics of success were manipu: lated by varying the proportion of balls in each ‘bag. Moderating variables manipulated were absolute magnitude of the joint probabilities and magnitude of the difference between first and sevond stage probabilities. In most trials, the joint probabilities of the two sets were equal. In the remainder, predetermined differences existed. The results strongly suggest that subjects did not just combine the probabilities multiplicatively to form expecicd value. Theie was a significant subject preference for higher initial probabilities. Absolute magnitude of joint probabilities did not have 2 significant effect, but the levels of differences between initial probabilities did significantly affect the choices. Finally, there was some evidence w indicate that subjects would prefer lower expected value (oint probabilities) sequences provided the first-stage probabilities are higher. Dickhaut & Eggleton (1975) researched the nature of materiality thresholds. They designed their experiment to test the analogy between the process of making comparative judgments of numerical information and the psychophysical process of judging the brightness or intensity, of physical stimull, This study was prompted by the Rose et al. (1970) conclusion that such judgments reflected Weber’s Law which suggests that a just noticeable difference is a constant ratio of the standard in which it was established. Graduate students judged whether a particular ourcome was 27 essentially less than, not essentially different from, or essentially higher than an expectation. The experimenter manipulated the type of task (accounting oriented versus non-connotative), the sequence of data presentation (random versus non-random), and the tormat ot companson stimuli (expectation and actual versus expectation, actual, and difference). In all conditions, half of the trials used 2 standard of 2,000 and half used a standard of 80,000. The resulting dats appeared to bbe consistent with Weber's Law and, of the ‘manipulated variables, only the random present tion had © significant, but minor, effect. Plots of the subjects’ judgments, however, did not resemble plots of psychophysical judgments where one normally finds that stimuli near the noticeable difference threshold have a higher probability of not being consistently classified. The results suggest that subjects form simple percent-f- expectation decision rules and apply them consistently throughout the experimental task. Dickhaut and Eggleton also introduced a decision luce questionnaire which proved useful in eliciting the heuristics used by the subjects during the task. Similar questionnaires would seem quite useful in other heuristic experiments, as 2 tool for crossmethodological validation, It has the advan- tage of flexibility which allows tailoring of the instrument to specific hypotheses. Summary. Table 2 below summarizes the studies reviewed in this section and relates them to our classification scheme. In the Bayesian framework, there are many potential variables amenable to study and only s few accounting studies. Thus no general conclusions concerning information processing behavior are apparent in the accounting literature. Barefield (1972), Dickhaut (1973) and Swierings et al. (forth: coming) have demonstrated the viability and efficiency of using Bayes’ theorem as a standard against which one ean view actual judgments of decision makers. This method is especially well suited for examining the impact of information set variables (e.g. aggregation and alternative informa- tion structures) and variables characterizing both “the decision maker and the decision rule. Where criterla already exist, Kennedy has shown the utility of Bayes’ theorem as a descriptive model of ‘cue usage and predictive significance. In this mode, Bayes’ theorem is compatible with the lens mode! paradigm and is more useful in realistic settings. The one consistent finding in this section is thatROBERT LIBBY and BARRY L. LEWIS synunsa Jo auaptzuo> sete woud 0} 4 -Ansmpuy 69 paso sone sai J0 A2EIn29 suisnxs ye fiensouep v5 aim Koermane put red ape pew one Aanbo 0} 19aqsoreums9 i poy soner ny wonsesoiu Kea-2any “diy paonposd woqs4s2ffs “toaye neieno rors ou) ents reumido 10 8 apreay nq AouSSII00 ajowo1d 0 popuer vonedarRaesi, 19242 ON, ven say (oem 30m 4 2841, (eeap Guz ssourng sa yoemege) yen Jo 24K Ta) $9n9 Jo Joquiny, (avin oeIm20y (rap sero yo sgt (Eq) wonedartBy cea sdppuoneeN (rym foemn20y 91H) sojgeuey, 9901 stousng-ou pu seu er syuuutodyo patron 1 oyu Wo) tasqns Jo Aunqeqond ateumsy suodor om o1n 30 vopeurquioa seuy #20 sodas Terres om toss fortuo> Jo m0 10 w Fess2004 ARSED aL siuapois TBI 9I¢ ‘imapms VR OLE 2040 U90T $C ownssouring -gsovenpessiopu, *SU2pm VISH RZ aye vomne @upwooxp20y) pp Husain, (cco) preven ‘pms, 258 yoxdky, ‘apm yuauifpaf arismiaegord yo ATeUUMS °Z ATVx9 HUMAN INFORMATION PROCESSING RESEARCH IN ACCOUNTING fone ‘Bupias 10 yeuso) on "wounodss suo oy nye coon mg ‘Suaspuoo 5 yo 2g UopSE=D lepue}+joussied s}4us Woy ‘Ualjo s39f4nG opesydo4s fede te9301d 99 Y .a8q34 th} 1UD}ISUD9 sTUUAspMP sys pares seugeqoud ae) entut uaom S2usteytP Jo aPAHINsEH I> MKO Aas soa aya pajzodo ways ymgoud aes: oye s129190, ‘wees jou 101oe5aouanadea ow 10 om ape 3,95 ‘uous avo ape a." aydures ‘01 aaisupsu)Soue}uos24001 ‘pus sous 940105 oousayand yo 20u9pu (qn) weun04, (avin Aoesnaoy (ea) sonsuneyt (a1) souenbos (9) twats voneojuy suse sayerouuosuou pue suing = equa 40 sed Jo Ayes 93pm enmaraoi yeabo aye san auay sata paouonbas $e sos uaa 25001) se uognengesa yuaupns ‘suapms aenpeig, uoussouiong 8 sauapnis emote 22 evap fuyanceid 211 (wis) voto vineword, usp) vey yp (e109) 2 TV260 decision makers douse simplifying heuristics in their processing of information. This confirms most previous rmeaarch in peychatogy., although two of the studies here indicate that use of heuristics is context specific. Three major accounting policy issues have been addressed by this research. The Dickhaut & Eggleton (1975) study adds further support to our earlier conclusion with respect to. materiality materiality is essentially a percentage comparison. ‘The question of aggregating financial intormation has been examined by both Barefield (1972) and Ronen (1971). The combined results are vertainly not conclusive. Barefield found no overall significant effect of aggregation. When decisions were viewed as a combination of consistency and optimality of criteria, disaggregation and aggrega- tion wore favored reopectively. Ronen, however, showed that disaggregation can lead to significant sequence effects where subjects prefer one sequence to another with identical expected value. His results question the validity of judgmental aggregation of probabilities when the vesults of the components of an audit are combined in an overall judgment of the probability of a material ‘misstatement, OF additional interest to auditors, both Swiernga er al. (forthcoming) and Uecker & Kinney (1976) have shown evidence of the representativeness heuristic, especially insensitivity to sample size. These findings should add impetus to the already prevalent disdain for judgmental sampling techniques. Cognitive style ‘The accounting studies in this area focus their attention on the impact of judge characteristics on characteristics of the decision rule in information processing, Most of these studies are derived from the Schroder, Driver & Streufert (1967) “human information processing systems” research. In this research, an attempt is made to categorize decision makers according to their cognitive differences or, more specifically, according to their style of information processing. Early psychological studies focused on optimal information loads and found that some decision makers consistently used ‘more information than others. Accountants have been concemed with the effects of cognitive structure and information structures on the quality of decisions and the actual and perceived use of information. The aim of the research is design of information systems best suited for the individual style of the deciston maker. ROBERT LIBBY and BARRY L. LEWIS: Mock, Estrin & Vasathelyi (1972) studied the relationship between different information steuc- tures, decision approach, and learning patterns Decision approach was divided into two persistent cognitive styles found in related literature, heuristic and analytic. The heuristic approach is characterized by trial and error and satisticing behavior as contrasted with the analytic approach which emphasized mathematical analysis and optimization. Businessmen and students were asked 10 make decisions concerning production and advertising levels for fifteen decision periods. Tho decisions were dependent on price and demand factors which were given to the subjects tunder a real-time information structure (f,) or a Tagged information structure (J) where J, is intended to involve less uncertainty than’ I, Foodback was communicated to all subjects in the form of financial statements. Profiles obtained in & postexperimental questionnaire were used to classify subjects as to decision approach. ‘The results showed that analytics significantly outperformed heuristics in terms of both profits and decision time. In contrast. learning, whether defined as improved profits or as decreased decision time, was not affected by decision approach. In addition, learning was not affected by the information stuucture, Dermer (1973) investigated the relationship between a personality characteristic. level of tolerance of ambiguity, and subjective cue usage. Intolerance of ambiguity was chosen for study since it is conceptually related (o dogmatism and cognitive complexity, variables cited in Dermer's review of psychological studies in information processing. In the field study, oil company sales personnel were asked to role play in one of two istrict sales manager jobs with which they were familiar. Aspects of the jobs were classified into three schemes, indicating focus of control measurement method, and time frame. This 2X 3X2 classification, then, forms twelve possible categories. Six job aspects were chosen from each of twelve categories. Subjects were then asked to sort the 72 job aspects into a forced-normalshaped distribution reflecting rela tive importance of the job aspects in the performance of their roles. They were also asked to indicate separately the number of items they considered to he of little importance. Subjects ‘were classified as to the level of intolerance of ambiguity based on their scores on a questionnaire ‘esigned for that purpose.HUMAN INFORMATION PROCESSING RESEARCH IN ACCOUNTING esults indicated a significant positive correla- tion between ambiguity intolerance and the amount of information perceived to he important This finding is generally consistent with Schroder et al. (1967) who found that conceptually ‘concrete decision makers maicatea preference 10r more information than did conceptually abstract decision makers. The finding contradicts several other studies, a fact Dermer attributes to possible contextual effects. Results of this study also indicate that intolerants view internal aspects as more important and future and behavioral aspects sc lote important. Driver & Mock (1975) studied the relationship of decision style to the preference for and use of accounting feedback. Decision Style Theory (Driver & Lintott, 1973) is a development of the basic Schroder ef al. model that recognized two dimensions of information processing. The basic model recognized that some decision makers consistently used more information than others. But, in addition to the amount of information ved, there was also a difference in degree of focus. At one end is the decision maker who perceives data as leading to a single solution; at the other end is one who allows multiple interpreta- tions. The two dimensions yield styles as indicated in Fig. 2 (Driver & Mock, 1975). One other style, labeled complex, is a mixture of Integrative! Hierarchic. In a. business game, MBA students ‘made production and marketing decisions over five decision periods. As in prior studies (e.g. Mock et j., 1972), decisions were based upon various demand and price factors. Standard feedback was given in the form of financial statements. Subjects had the option of purchasing additional feedback reports, a behavior viewed as preference for additional information. Actual use of additional information was grossly measured by decision time. Subjects were classified as to decision style according to their performance on the Integration Style Test. The basic hypotheses were in line with 261 previous research that more complex decision makers would purchase relatively more informa- tion and require relatively more decision time. Although the results indicated no overall sini cant effect of decision style on purchase behavior, ‘matcheo-paits analysis showed purchase benavior generally consistent with Decision Style Theory and prior findings. Decision Style did have a significant overall effect on decision time. Again, comparison of pairs showed anticipated relation- ships with the exceptions that. low-purchase Decisives were the slowest decision makers and that rolatively high-purchace Hierarchies were the fastest. The slowness of the Decisives was attributed to the possibility of overload in this complex, highly structured task. The speed ot the Hierarchics is viewed as a modification of existing theory ‘Mock & Vasathelyi (1976) report an explors- tory study into the cross-contextual analysis of cognitive style and information structure effects. In further tials of two experiments, each provioutly used by the author, the reculte indicate consistent information structure effects but less consistent cognitive style effects in terms of information use perceptions. San Miguel (1976) examined more general information processing hypotheses. In his study, subjects were asked 10 choose one of three levels of operation in a plant of a multiple-goal firm. Varying levels of environmental uncertainty were introduced by presenting various levels of probability of losing a major goverment contract. Schroder et al. (1967) emphasized that the level of information processing of decision makers could be represented by an inverted U-curve over the ange of environmental complexity with the ‘muanimnusn processing at some optimal level of complexity. San Miguel’s results were consistent graphically and statistically with this thesis. He used number of items of information purchased as 2 surrogate for the level of information processing. one Decisive Wueraren Winimor Mormon Information use FieROBERT LIBBY and BARRY L. LEWIS indiqur Jo 20ues3}UN 430 PHO] a|ATS UOISSOP UNION vwonesapyuos Jo} sunt 316% ‘Avrxayauoo yweunvon ae estes Butta ropa any po08 op o tue at ‘suomezedo Jo that 200113 ured yosew y2005 pay yptoudde sou 91618 wos9p J5HEN, -poods uorstoop 1294 pip as werssaq "s950212) 99 3 (2161) 10127008 39 euon ppt semyoind pynos s29f@ns Weiet) 1972 90% ID sroroey suapms Van +2 pms VA 16. squapms a1enpe'n oF sugpms van 65 pruned ses Kueduioa na ¥ (us pe au renting us "° contra ops ois annuloo jo Azewumng '¢ STEVEHUMAN INFORMATION PROCESSING RESEARCH IN ACCOUNTING. Overall differences in mean information purchases were statistically significant as were five of ten pairwise differences. The experiment also examined the effect of two personality measures, flexibility and intellectual efficiency, and the effect of individual levels of integrative complexity ‘on performance and information purchase bbchavior. Although graphic results were generally in line with cognitive style theories, the only statistically significant relationship "was that between performance and intellectual efficiency ‘measures. In addition to personal characteristics and environmental complexity, McGhee, Shields & Bimnberg (1977) emphasize task-related variables in the formation of human information processing models. They believe that prior cognitive style researc: in accounting implicitly assumes stability of the impact of cognitive differences over time and across situations. Thev further express doubts 35 to the utility of the concept of personality in information processing models. In support of their position, MoGhee er al, review corroborating themes from both personality and cognitive psychology. The general thrust of the literature they review (especially, Mischel 1968, 1969, 1973a, 1973b; Bem & Allen, 1974; Bowers, 1973; Newell & Simon, 1972; Payne, 1970) 1s the need to include the person, the task and the person-task interaction. McGhee et al. also report the results of a laboratory experiment which also integrates the use of the lens model approach. ‘They used a linear judgment model to investigate the role of cognitive constructs in information processing In their experiment, subjects were asked to rate firms for possible inclusion in an investment portfolio based on eight financial cues. Dependent variables were the judgment, the degree of confidence in the judgment,” the amount af additional information desired and the range of alternatives a subject might consider in his evaluation. Subjects were classified as 10 level of intolerance of ambiguity and as to decision style. ‘Their results failed to indicate any significant relationship between cognitive differences and the dependent variables. ‘Summary. The studies reviewed in this section are summarized in Table 3 below. These studies have examined the effect of various cognitive characteristics of the decision maker and various information structures on cue usage, information 263 search, quality of the decision, and earning. The results of the various studies are difficult to compere because of the various constructs and dependent measures that have been employed. Mock e7 al_(1972) found that decision approach haad a significant effect on performance, but in a similar task Mock & Vasarhelyi (1976) found that neither decision approach nor decision style affected performance. Mock et al. found that decision approach had no effect on decision speed, but in a similar task Driver & Mock (1975) found that decision style did affect speed. There has been some consensus on the effect of cognitive structure on perceived use of information. Dermer (1973) showed that level of intolerance of ambiguity affected perceived importance of information; Driver & Mock (1975) found significantly different information — purchase behavior between decision style pairs, although ‘there was no overall effect: and Mock & Vasathelvi (0976) found that decision style and decision approach explained minor differences in perceived need and use of information; but neither San Miguel (1976) nor MeGhee ef al. (1977) found significant effects. If we are to tailor information systems to classes of users, it is clear that more definitive resulis are requtfed. The recent efforts of Mock & ‘Vasathelyi (1976) and McGhee ef al. (1977) are appropriate efforts in that direction. Their ctostcontextual approach shows promise. They recognize the need to examine similar constructs across a variety of settings, to measure the relationships of the various constructs, and to fvamine the ineimiments weed to categorize the cognitive style of decision makers. DIRECTIONS FOR THE FUTURE Although human information processing research is receiving increased attention by accountants, such research in accounting contexts is still in its infancy, The existing studies can be described as the testing of our “methodological muscle” where we have attempted to replicate psychologists’ findings from other contexts. In ‘most cases, these findings were replicated, but with some interesting exceptions (e.g. the finding lf high selfsinsight and berween.subject agreement in tasks with well-defined criteria performed by highly-trained subjects). The importance of these exceptions 1s confirmed by the publication of two264 ‘accounting studies in psychological journals (Ashton, 1974c; and Libby, 1976a). However, thece aaely ctuslieg have jet cevatched the eurfaoe of useful areas of research. The remainder of this section will delineate what we believe to be fruitful directions for research using the three approaches and changes and extensions of the approaches necessary to make them more useful in answering accounting questions. Lens model research We have identified five useful directions for lens ‘modal research in accounting contexts. The first is really an extension of the existing work. We know very little about how information is combined and the qualities of the resulting judgments in auditing and managerial decision making. Existing studies in auditing have investigated the determinants and quality of internal control and materiality judgments, While additional study of these two judgments is necessary to gain a complete understanding of the situations, other judgments such as the determination of acceptabic error in variables sampling, the timing of procedures, the auditor's expectation of error, evaluation of management competence, and tradeoff between ‘compliance and substantive testing are also worthy of study. The professional literature usually provides only general discussion of these judg- iments. Except for a few studies of risk analysis (Gee Libby & Fishburn, forthcoming, for a review of this area) and production planning (e.g. Bowman, 1963), dhe area of managerial decision making has not been the target of descriptive information processing studies. This type of descriptive research provides a basis for the evaluation of alternative decision strategies, allows for better communication of explicitly specified decision parameter estimates, and is useful in educating novice decision makers. The use of process tracing models (see e.g. Hogarth, 1974; and Payne, 1976) shows great promise for providing more detailed descriptions of the way in Which information is combined. Such models are ‘not subject to the insensitivity of the linear model to alternative weighting schemes (see e.g. Dawes & Corrigan, 1974) as are the traditional lens model approaches. Clarkson (1962) provides an early application of process tracing in a financial context. ‘A related suggestion is the need for research in more realistic settings. Findings of significant comteriual effects tequite that gteat cate be taken ROBERT LIBBY and BARRY L. LEWIS. in maintaining the representativeness of chosen research designs (see Hammond & Stewart, 1974, for an excellent diseussion of this point). Context specific findings make generalization difficult Also, as we are interested in generalizing our results to actual accounting contexts, studies in natural settings can provide confirmation of the generality of experimental findings. Stenson (1974) discusses possible applications of lens model methodology to natural settings and their uumutations. ‘The major limitation of the lens model approach is that, to take advantage of all of its power, it may only be used to study highly structured repetitive tasks. As Einhom (forth- coming) points out, this structure eliminates many of the characteristics of certain important judgment situations. However, within the context cof structured tasks, this approach is an extremely useful tool for study of the impact of information set variables on the characteristics of the decision rule and the quality of judgment. This area of study is of great interest to accountants as many information choice issues can be decomposed into questions of the impact of combinations of the information set variables listed in Fig. 1. Ashton (forthcoming) isa recent example of an attempt to apply this approach to this type of question. The rapidly expanding multiple cue probability learning (MCPL) literature (see Slovic, Fischhoff & Lichtenstein, forthcoming, and Brehmer, 1976 for reviews) will provide guidance to accountants interested in this area. A major portion of the MCPL literature is aimed at identifying the impact of information set variables upon the individual's ability to learn the appropriate decision rules and the ability to improve this leaning with different types of feedback. Accounting research based upon this literature could provide a basis for identifying situations where altering the information set, providing certain types of feedback, and use of Certain decision sids may result int improved decisions. For example, researchers interested in developing feedback systems within the context of ost control would find guidance in the research indicating the ineffectiveness of traditional outcomesfeedback systems (eg. Hammond, Summers & Deane, 1973), Of particular impor tance to those interested in improving the quality of production planning and commercial [oan decisions and certain audit judgments is the wide-ranging literature on decision aids developedHUMAN INFORMATION PROCESSING RESEARCH IN ACCOUNTING based on the lens model approsch. Techniques for developing man-machine systems which employ objective combination rules such as bootstrapping, equal weighting models, expert measurement and ‘mechanical combination, and multiattribute utility models (see e.g. Goldberg, 1970; Einhorn & Hogarth, 1975; Einhom, 1972; and Huber, 1974, respectively) would seca to have nunwvous spplications in accounting contexts. These tech- niques skirt many of man’s inherent information processing limitations. Adoption of such tech- niques by accountants must await testing of their ‘major assumptions in accounting contexts, ‘A final area of great potential interest to accountants is recent research on the impact of fallible clinical judgment on the quality of decisions and its relation to the setting of standards. Einhorn é Schact (1977) present @ detailed discussion of the impact of even minor imperfections in information or judgment on the ‘minimum error rate in decision making, This research has important implications for the setting of standards for decision makers and the evaluation of auditors’ rate of failure to uncover material errors in financial statements Before direct applications may be made, research determining the values of relevant parameters in sccounting situations must be performed. Probabilistic judgment The implicit goal of HIP accounting research is to improve decision making. The probabilistic judgment literature in psychology can provide guidance in determining areas in need of improvement and methods for providing the needed improvement. The heuristics and biases literature suggests areas where faulty probability estimates may be made, However, the existing psychological literature suggests that employment fof heuristics ic highly situation specific, This requires that accounting researchers study these situational determinants in accounting contexts. Within our general classification, we need to Investigate the impact of information set variables on use of heurieticr. The findings of Swierings e ai, (forthcoming) and Uecker & Kinney (1976) suggest that some sort of sequential or contingent processing model based upon task characteristics may be employed. Papers by Payne (1976), Payne 4 Braunstein (1972), and Einhorn (fortheoming) provide additional discussion of this point. ‘Once heuristics have been matched with situations, it must be determined when the 265 heuristics work poorly and when they do not (Einhorn, forthcoming). This requires analysis of the sensitivity of decisions to erroncous estimates of probabilities. In cases where errors materially affect decisions, the Bayesian literature suggests numerous methods of improving these estimates. ‘A major part of the Bayesian literature reports on tie develupnout uf esiaion aida alined ot improving probability estimates. A fruitful area of research for accountants is to attempt to modify and apply these techniques to accounting con: texts. The basic decision aid developed in this literatuie is Edwaids' (1962) Probabilistic Infor mation Processing System (PIP). This method decomposes the problem by having the decision maker estimate the prior probabilities and the conditional probabilities of each piece of informa- tion on each hypothesized outcome. These probabilities are then combined using Bayes’ theorem, (See Slovic & Lichtenstein, 1971: Lee, 1971; and Beach, 1975 for a review of the PIP literature.) Variations of the system include the use of objective probabilities computed from historical data-outcome matrices or alternative methods of assessing subjective probabilities. Some of the research on the elicitation of subjective probabilities necessary for the implementation of these systems in accounting contexts 1s already being carried out (see Chesley, 1975, for a review and Felix, 1976, for 8 recent empitical project) In addition to improving probability estimates, this decomposition approach also produces some side benefits to decision makers. Explicit state- ment of the component judgments in the form of probabilities instead of categorical statements can Gecrease miscommunication between members of decision making team (Beach, 1975, p. 18). Objective or subjective base rate (prior pro: bability) and dats-outcome matrices can be used to educate novice decision makere. Instruction in the appropriate method for combining informa- tion (Baye theorem) can also be wed in the same fashion. We believe that this line of research would be most useful if applied in the arca of auditing and management control. There are numerous ecasions in the audit process where heuristics may produce biased judgments. For example, misperceptions of compound probabilities may produce improper aggregation of materiality estimates from different parts of the audit and misperceptions of chance occurrences in analytical review may produce spurious conclusions. The26 decision theory approach to final audit judgments and the use of regression analysis in analytic review are examples of possible approaches to the development of decision aids which might alleviate these problems. In the area of control, a ‘misunderstanding of regression toward the mean and hindsight bias* may distort evaluations of the ‘effectiveness of feedback. Insensitivity ta priors ‘may have an impact on one’s judgment of the significance of variances. If these and other biases exist and are found to be matenal, decision aigs or training techniques need to be developed to reduce their impact. Cognitive style ‘The tailoring of information systems to classes of users requires more definitive results in this area. The recent offorts of Mock & Vasashelyi ROBERT LIBBY and BARRY L. LEWIS they recognize the need to look at contextual effects, The possibility that contextual variables interact with cognitive style makes the goals of this esearch much more complicated. As McGhee et al. (1977) suggest, the importance of contextual variables is becoming more apparent in many areas ‘of applied psychology and may overshadow the importance of individual differences. Mock & Vasarhelyi (1976) and McGhee er al (1977) recognize a final important point: the need {fo cross methodological Dounds in informacion processing research. 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