Knowledge that Transforms

Financial analysis, Decision making, Human information Processing, Predictions

Information evaluation model, Decision making, Lens model, Feedback

Disclosures, Informational content, Abnormal returns, Trading volume

Credit ratings, Municipal bonds, Financial reporting, Monitoring

Executive compensation, Executive stock options, Equilibrium warrant pricing model, APB opinion No. 25

Segment reporting, FASB Statement No. 14, Mandatory disclosure, Net social benefits

Price reaction, Volume reaction, Earnings Announcements, Information dissemination

The primary purpose of this paper is to test for the use of the representativeness heuristic by auditors in situations in which its use will lead to judgments that systematically depart from the Bayesian optimal responses. No explicit representation of payoffs was made, nor were subjects typically asked to choose a course of action. Thus it cannot be concluded that use of the representativeness heuristic in the experimental situations tested is not cost effective. To the extent, however, that one is willing to assume that action choices are sensitive to judgments of outcome probabilities, and these action choices have differential expected payoffs, a finding of extensive heuristic use by auditors would suggest further research to assess the economic consequences of such use.

Human information processing, Cost variance, Cost effectiveness

Stock returns, Stock return measure, Raw returns, Residual returns