Decision-Making and Accounting
Question#1: Information or data is the backbone of decision-making, but uncertainty is the bane of decision-making.
How do we make important financial decisions when faced with uncertainty? Give examples.
Below are links to the articles. Read and reflect upon how we make Financial Decisions. You may wish to do some research of your own. Make sure you support your statements.
Testing Alternative Theories of Financial Decision Making.pdf
Unknowns Black Swans and the risk uncertainty distinction.pdf
Keynes’s uncertainty is not about white or black swans.pdf
Of Black Swans and Tossed Coins.pdf
Queation#2: Accounting is called the language of business. It is how we interpret the financial well-being of an organization. The value proposition is at the heart of competitive advantage. How we measure value becomes extremely important.
What is the true value of an organization? Pick any company that you are interested in and study its financial statements. Specifically, compare its net income vs. cash flow, book value vs. market value of stockholders’ equity (market capitalization), and share your observations with the class.
Below are links to the articles. Read and reflect upon how we make financial value judgements. You may wish to do some research of your own. Make sure you support your statements.
Value Creation - Accounting-1.pdf
THE RELEVANCE OF PSYCHOLOGY THEORIES TO FINANCIAL Abstract ACCOUNTING.pdf
Decision-Making and Accounting
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Decision-Making and Accounting
Question 1
In accounting, uncertainty describes the inability to forecast results or repercussions due to a lack of information or a foundation to establish forecasts. Thus, following particular steps while making crucial financial decisions in uncertain circumstances is crucial. Financial decision-making is a very broad field of research with many competing ideas. In most circumstances, financial applications are processed under the pretext of the expected utility hypothesis. Prospects are ranked randomly according to their predicted utility. Challenges that require choosing appropriate variables must be solved analytically to apply the anticipated utility function effectively. Financial decisions are made by considering corresponding budget limitations in particular conditions, such as the optimal hedging problem (Terzi, 2010). Other times, the budget restriction manifests as the restriction that the sum of the value weights cannot exceed one, like in the ideal portfolio diversification concept. Expected utility, a highly debatable issue that cannot be immediately observed, is the main issue in either case (Faulkner et al., 2017). Thus making financial decisions even more difficult. Finding an expected utility function that accurately represents the utility mapping is a vital step in this process of issue optimization. Thus,