BASIC PREMISE 1: The economic paradigm has been a dominant paradigm in analytical auditing research.
BASIC PREMISE 2: While the traditional modeling approach has made important contributions, it does not adequately represent the auditors role...
CURRENT DEVELOPMENTS: …recently economic theory has benefited from recent developments in sociology, psychology, philosophy, artificial intelligence, and jurisprudence…
It is necessary for auditing academics to familiarize themselves with these issues in order to better inform experimental and archival efforts, and perhaps even take part in the analytic work itself.
THE TRADITIONAL ECONOMIC PARADIGM: Economic actors: T1) are self-interested (with guile); T2) maximize their discounted utility of personal payoffs; T3) have complete & transitive preferences.
Observation (T1): Self interest is a simplification useful for modeling various phenomena.
If we COULD neatly order our preferences over payoffs, we would NEVER face dilemmas…. Just choose the highest ranking alternative.
ILLUSTRATION: From Keim and Grant (2003, 398): You [auditor] have just returned from a lunch with Jay Hoffman [long-time relationship], the new chief financial officer (CFO) for Bell Manufacturing….
…He then told you …xxxx…. and asked that you keep this in confidence.
Conflicts between rules (principles): Rule 1) Keeping confidences; Rule 2) Obligation to identify ethically-challenged individuals.
Problem: incommensurability. A. Impossible to measure or compare. B. Lacking a common quality on which to make a comparison.
Illustrations Of Research Related to These Issues
EQ1: the rate of increase in the probability of not stealing, q1, increases (decreases) with the probability of monitoring, p1; EQ2: the rate of increase in the probability of monitoring p1 decreases with the probability of not-stealing, q1.
Laffont (1975) describes an approach called Kantian economics.
Kants first categorical imperative is: "Act only according to that maxim by which you can at the same time will that it should become a universal law."
Laffont first supposes that a particular agent has utility function, U(x,y,P) where the agent has direct choices x and y (two consumption items) and P represents the cumulative (say, additive) effect of this y and all other agents -choices
RECALL: Kants first categorical imperative is: "Act only according to that maxim by which you can at the same time will that it should become a universal law."
There are more recent, but related, formulations as well: E.g.,. Brekke, K, S. Kverndokk, and K. Nyborg, 2003, A Economic Model of Moral Motivation, Journal of Public Economics
Modeling considerations: Ethical/norm-driven decisions have some interesting properties..
For example, Etzioni (1988, 76): Choices that are relatively heavily loaded with moral considerations, including many economic choices, are expected to be..
1) unusually difficult to reverse (i.e., they are asymmetrical), 2) to be very lumpy (highly discontinuous) 3) to reveal a notch-effect (a resistance to pass through a threshold, that makes the behavior sticky before it is passed; the reluctance is greatly lost once passage is completed
It is interesting to note the paper by Gneezy and Rustichini (2000), which appears in the Journal of Legal Studies.
Problem they examined: Late- coming parents at an actual day- care center.
RESULTS 1) the number of late-coming parents significantly increased when a day-care center introduced a fine for late-comers 2) no reduction in late-coming occurred after the fine was removed – suggesting a permanent change in the parents behavior
1)Big changes IN BEHAVIOR may indicate multiple equilibria. 2) Big changes IN BEHAVIOR may indicate that we play language games.
1)I know that you know, 2) I know that you know that I know, 3) I know that you know that I know, that you know etc… This is an example of an infinite regress.
It is not clear that the human mind can handle this sort of complexity. There must be a mechanism to make this problem manageable.
By adopting stereotypical (rule- driven) behavior, the need for second-, third-, etc., conjectures disappear. To the extent that stereotypic behavior enhances the predictability of others, it enables cooperation.
Battle-of-the Sexes One person likes going to the football game, the other likes opera. However, both prefer going to the less preferred activity with company than going alone to the preferred activity.