[Professional standards for analytical procedures call for auditors to hypothesize likely causes of unexpected patterns in financial statement balances and to develop plans to investigate (SAS 56). Therefore, audit efficiency and effectiveness depend on competency in recognizing patterns in financial data and in hypothesizing likely causes of those patterns to serve as a guide for further testing. Yet our knowledge of how well auditors accomplish these crucial steps has been limited by the difficulty of developing research tasks with criteria for evaluating auditor performance. The purpose of this study is to relate processes of pattern recognition and hypothesis generation to quality of performance in an analytical task. To accomplish this purpose, we conducted a laboratory study in which 21 auditors were asked to think aloud while performing an analytical procedures task. The case contained a seeded error that caused a fairly complex pattern of discrepancies between projected and unaudited financial ratios and balances. Think-aloud verbal protocols provided a trace of subjects' reasoning processes, and the seeded error provided an outcome criterion to evaluate the hypotheses they generated. This design supplies evidence needed to evaluate pattern recognition and hypothesis generation processes that lead to correct and incorrect outcomes. Results indicated that three auditors made acquisition errors and four failed to combine crucial cues into a pattern. Of the 14 auditors who recognized the pattern, six proposed a hypothesis consistent with the pattern. Thus, hypothesis generation was the stage at which process errors most frequently occurred, and the least experienced auditors had the most difficulty at that stage. Specific process problems that inhibited generation of a correct hypothesis included: addressing only part of a recognized pattern, and/or fixating on a certain error type. Thus, protocol analysis allowed insight into which stages in the process proved most difficult for the auditors and why, providing a focus for further research and decision aid development. This research responds to the call for inclusion of criterion outcomes in audit judgment research (e.g., Libby 1981; Ashton 1982; Biggs 1985; Davis and Solomon 1989). The importance of criterion outcomes can be seen in the advances made in decision research in medicine (e.g., Johnson et al. 1982; Patel and Groen 1986; Lesgold et al. 1988). and physics (e.g., Chi et al. 1982; Robertson 1990). In medicine especially, the ability to relate diagnostic processes to outcome quality has contributed to the theory and practice of medical decision making (Kassirer 1989) in ways that have been unavailable in auditing.]

Our subject is estimation and inference concerning long-run economic equilibria in models with stochastic trends. An asymptotic theory is provided to analyze a menu of currently existing estimators of cointegrated systems. We study in detail the single-equation ECM (SEECM) approach of Hendry. Our theoretical results lead to prescriptions for empirical work, such as specifying SEECM's nonlinearly and including lagged equilibrium relationships rather than lagged differences of the dependent variable as covariates. Simulations support these prescriptions, and point to problems of overfitting not encountered in the semiparametric approach of Phillips and Hansen (1990).

Charles Bean, Mathias Dewatripont, John Moore; Special Issue: The Econometrics of Financial Markets, The Review of Economic Studies, Volume 58, Issue 3, 1

Deductive equilibrium analysis often fails to provide a unique equilibrium solution in many situations of strategic interdependence. Consequently, a theory of equilibrium selection would be a useful complement to the theory of equilibrium points. A salient equilibrium selection principle would allow decision makers to implement a mutual best response outcome. This paper uses the experimental method to examine the salience of payoff-dominance, security, and historical precedents in related average opinion games. The systematic and, hence, predictable behavior observed in the experiments suggests that it should be possible to construct an accurate theory of equilibrium selection.

This paper employs a “transaction” data-base to study whether observed quote-revisions are consistent with those predicted by the adverse selection and inventory cost theories of the bid-ask spread. We find that actual quote-revisions are consistent with the theoretical prediction in only 25% of the cases. Furthermore, quote-revision patterns are found to be strongly dependent on the level of the outstanding spread and, to a lesser extent, on the transaction size. These systematic patterns, unrelated to the inventory cost and adverse selection theories, are consistent with the effect on quote-revisions of the limit order book and the minimum 1/8 price-change rule.

This paper employs a "transaction" database to study whether observed quote revisions are consistent with those predicted by the adverse selection and inventory cost theories of the bid-ask spread. The authors find that actual quote revisions are consistent with the theoretical prediction in only 25 percent of the cases. Furthermore, quote-revision patterns are found to be strongly dependent on the level of the outstanding spread and, to a lesser extent, on the transaction size. These systematic patterns, unrelated to the inventory cost and adverse selection theories, are consistent with the effect on quote revisions of the limit order book and the minimum 1/8 price-change rule.

ABSTRACT This paper employs a “transaction” data‐base to study whether observed quote‐revisions are consistent with those predicted by the adverse selection and inventory cost theories of the bid‐ask spread. We find that actual quote‐revisions are consistent with the theoretical prediction in only 25% of the cases. Furthermore, quote‐revision patterns are found to be strongly dependent on the level of the outstanding spread and, to a lesser extent, on the transaction size. These systematic patterns, unrelated to the inventory cost and adverse selection theories, are consistent with the effect on quote‐revisions of the limit order book and the minimum 1/8 price‐change rule.

This paper proposes criteria for classifying time-series forecasts of inflation as weakly, sufficiently, strongly, and strictly rational. Forecasts taken from the ASA-NBER surveys, some well-known one-step-ahead forecasting techniques, and a novel variable length autoregressive moving average model are tested against these criteria. None of the forecasts series meets the criteria for strict rationality nor, even, the less demanding criteria for strong rationality. While agents forecast as best they can, their forecasts are not likely to meet stringent rationality criteria suggested by econometricians. Copyright 1991 by MIT Press.

The effects of the changing U.S. age distribution on various macroeconomic equations are examined in this paper. The equations include consumption, housing-investment, money-demand, and labor-force-participation equations. There seems to be enough variance in the age-distribution data to allow reasonably precise estimates of the effects of the age distribution on the macro variables.