It may sound incredible to management accountants, but we are on the brink of a revolution in the science of economics and business. While economics and business are beginning to recognise the advantages that neuroscientific evidence brings to understanding the behaviour of people in firms and markets, our pilot study into the management accounting prospects of neuroscience indicates that its potential contribution to management, accounting knowledge could be huge. Management accounting seeks to understand decision-making, to estimate the future and evaluate the past. As management accountants we are increasingly aware of the effects that financial incentives have on information processing, decision-making, estimating and evaluating processes. Psychology is making swift steps towards becoming a harder science, and economics and psychology increasingly seem to agree on central concepts, such as "rational" and "irrational decision-making". This recent behavioural shift in the orientation of management accounting into the field of neuroscientific inquiry may lead to new and applicable knowledge about the role of management accounting and management accountants in organisations.
Neuroscience is the field of science that investigates which brain regions are responsible for specific functions of animals and humans, and how connections between brain regions affect behaviour. While focusing on various functions in the field of physical movements, but also on intangible functions such as memory and cognition, the role of neuroscience in human decision-making seems especially interesting for management accounting. Neuroeconomics, combining neuroscience, behavioural economics and psychology, draws on techniques of imaging brain activity during an economic task to explain the role that neural subsystems play in economic behaviour. Methodical advancements in this field allow researchers to open up what has thus far been considered a "black box". While much remains to discover, the joint research efforts of economists, psychologists and neuroscientists have resulted in the discovery of brain areas that are activated for conscious decision-making, coping with risk and uncertainty, inter-temporal choice, and reward and punishment. So what are the potential consequences for management accounting practice?
Neuroscientific research on decision-making has led to the discovery of two major decision-making areas in the brain. One is responsible for cognitive (i.e. rational) processes, while the other appears to be associated with the emotional aspects of decision-making. For management accountants, as guardians of rational decision-making in organisations, it is important to establish the interplay between these systems. Not only does such knowledge allow a more fundamental understanding of the origins of, and barriers to, "irrational" decision-making, but understanding how emotions may dominate cognition has important consequences for the way in which we design and use management accounting systems. It is therefore important to learn how the way in which we present our "objective" facts to support decision-making may in fact lead to emotions, rather than cognitive reaction. Neuroscience may explain why management accountants often have the feeling that their reports function as ex-post rationalisations of decisions already taken, rather than ex-ante decision-support material.
In business we regularly have to consider what level of risk is acceptable to the organisation. Management control systems typically assume that people adhere to some rational decision rules and are able to estimate the probabilities and values of future outcomes. Pre-neuro behavioural studies have shown that this is most often not the case.
Moreover, the way in which alternatives to a decision are presented to people affects their opinion about them and their choice between them. Behavioural economics shows that if alternatives …