Nexus of heuristics and accounting information in capital investment decision making

Abstract

PURPOSE: The objectives of the study are to (i) analyse the capital investment decision-making process and the factors influencing the decision-makers during this process, (ii) understand how concepts of heuristics and bounded rationality impact capital investment decisions in local food manufacturing and processing businesses, (iii) investigate to what extent, if any, do heuristics and bounded rationality take precedence over management accounting information in capital investment decisions, and (iv) investigate the role of the accountant as an adviser and the role of the accounting information provided by the accountant in the decision-making process. DESIGN: To achieve the objectives of the study, a qualitative approach was adopted where semi-structured interviews were held with twenty-one participants (decision-makers, accountants, and advisory consultants) to gain an insight into the capital investment decision-making processes in SMEs and how these decisions are guided by heuristics and/or management accounting information. FINDINGS: The findings indicate that decisional heuristics and bounded rationality are ingrained in the capital investment decision-making process in the businesses interviewed. Factors such as resource (cost and time) constraints, cognitive limitations, and pseudo-perceived usefulness or uselessness of management accounting information impinge on the process and results thereto. Insofar as there is no identified need for involvement of the accountant and use of management accounting information, heuristic decision-making supersedes more rational forms of decision-making. Where more resources are available, management accounting information is given precedence in discussions on capital investments. CONLUSIONS: The study concludes that capital investment decision-making guided by heuristics is not erroneous, rather it makes sense where limitations exist and the decision-makers’ knowledge and bias are rooted in experience. As companies increase in size, more accounting techniques and information are usually involved since there are more decision-participants, more resources available and there is a shift in mindset towards more professionality. The nexus of heuristics and accounting information describes where both bounded rational means of decision-making and some form of accounting information is used to drive capital investment decisions. IMPLICATIONS: This study sheds light on the decision-making processes in local SMEs and acknowledges that in some cases, there is no need for further involvement of an accountant and the decision-maker knowledge is sufficient. Notwithstanding, the importance of using both heuristics and accounting information was identified, and this serves as encouragement for accountants to provide consultancy services, governments to push their fundings for such services and decision-makers to seek information.