An Empirical Examination of Competing Theories to Explain the Framing Effect in Accounting‐Related Decisions

The purposes of this study are to explore framing effects in a managerial accounting decision context and to test the explanatory power of prospect theory and two competing theories, fuzzy‐trace theory and probabilistic mental models, on such effects. In Experiment 1, 86 undergraduate students made a choice between two alternatives in a managerial decision problem that illustrates a classic, Asian disease‐type business scenario. Results show that the subjects committed the framing effect bias and that prospect theory, fuzzy‐trace theory, and probabilistic mental models all predict the bias. In Experiment 2, a business variant of the Asian disease problem was designed to distinguish among the explanatory abilities of these theories in an accounting context. One hundred eighty‐five undergraduate students participated in the experiment. Results of Experiment 2 indicate that the fuzzy‐trace theory provides additional power to explain the framing effect. Hence, accounting professionals can design better approaches to reporting/presenting financial information that will help managers alleviate the framing effect in decision making.