Abstract
This study investigates the effect of the organization performance on two psychological biases, mental accounting and aversion to loss, on financial decisions to both investors and managers. To achieve this, two experiments are conducted. The first experiment consists of 40 graduate students as investors, while the second one consists of 40 accountants in a real estate company as managers. The results of the study indicate that the performance of companies impacts both mental accounting and aversion to loss of investors, whereas the performance of companies affects the mental accounting of managers in making their financial decisions but does not affect the aversion to loss.
Highlights
Traditional financial theories assume that investors behave rationally when making an investment decision
This paper examined the impact of companies’ performance -expressed in profit or loss- on tow behavioral biases mental accounting and loss aversion - when making financial decisions, whether for investors or managers
The results indicate that: 1- The performance of the company affects the mental accounting and aversion to loss for investors when making their decisions
Summary
Traditional financial theories assume that investors behave rationally when making an investment decision. They increase the expected utility function and follow the probabilistic Bayesian rules (Causi‚ 2017). Policymakers should understand the played role by disclosed financial information in such decisions when evaluating financial reporting practices to meet the needs of investors (Stålnacke‚ 2019). These theories ignore the fact that an investor is a human being who is affected by many biases that are inherent in his/her personality. Bias is a term that is intended to explain behavior, judgment or habits which are affected by various kinds of prejudice or presumption
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