Financial Accounting

Directions: Write 1 response to each Discussion. Pay attention to the prompts. Provide an
assessment of the information provided by your peers for prompts 1 & 2There will be a
total of 2 responses. Each response needs to be 1 to 2 pages. Use 2 to 3 peer-reviewed
sources for each response. Consider the following questions as you do so
1. How can the information presented be expanded upon?
2. Does scholarly research support the information presented? If not, provide
some supporting scholarly information if possible.
3. Are there other implications that should be considered that were not
addressed by your peers?
Discussion #1
Behavioral Finance Theory
Prompt 1:
The concept of behavioral finance is one of the more interesting concepts based on the
idea in which it is based upon a foundation where elements of both the fields of economics
and psychology are combined to better understand financial decisions that are affected by
biases and emotions (Antony, 2019). From the definition, it is observable that the concept
works to move away from the idea that economics is regimented and well thought but is
instead affected in ways where individuals are impacted by factors which have the
potential to lead to irrational decisions (Fromlet, 2001). Specifically, the concept of
prospect theory provides further credence to this takeaway based on the fact that the
theory works to explain how individuals manage uncertainty and risk within financial
decisions; within the theory, individuals make choices with potential gains and losses in
mind rather than keeping the final outcome as a primary goal which further highlights the
tendency of loss aversion where they are risk seeking when facing losses but risk averse
when facing gains (Vardia et al., 2021). Additionally, the theory and behavioral finance
move a step further in their emphasis on more specific biases such as herding behavior,
overconfidence, and anchoring, each of which lead to even further irrational decisionmaking processes (Fromlet, 2001).
This all ties directly into a relationship with organizational effectiveness based on the
notion of behavioral finance taking on a more prominent role where it can work to
enhance and develop practices associated with risk management by understanding the
impact these biases may have when making decisions, with risk perception fully in mind, to
adequately account for humanistic behaviors, thus allowing for the organizational
effectiveness to reach a more balanced state of loss aversion. Furthermore, behavioral
finance gives organizations an avenue from which to better understand organizational
member, and stakeholder, behaviors as it relates to financial matters thus improving upon
the quality of decisions within the organization simply from both recognizing and
addressing the biases at play (Antony, 2019).
Once these various intricacies are accounted for, it is quite apparent that if organizational
leaders are cognizant of these biases, they are better equipped to understand the overall
decision-making process simply by integrating insights learned through behavioral
finance. It is from this mindset where they have the ability to implement and apply best
practices not only within their direct reports but throughout the organization. Thinking
back to herding behavior, if a leader is aware of this bias, they can work to create a culture
where decisions are informed through differing perspectives and open communication to
ensure decisions are well thought out as opposed to narrowing in on one dominating
thought process which may be flawed (Fromlet, 2001). There is a trickle-down effect
within a culture such as this where checks and balances are implemented to avoid errors
and the biases that may creep in, something which is critical when working in the realm of
budgets and financial resources. These are just a few examples of best practices yet these,
and others, equate to an alignment of the organization’s strategic goals and objectives
with organizational leader decision making, all while increasing accountability and
transparency within in and outside of the organization.
Prompt 2:
Budgeting timeline is an easy one to call out for proposing what the best practice for
financial resource management is. Reviewing, updating, and changing the budget on a
quarterly or monthly basis has the potential to ensure all resources are allocated
efficiently. Traditionally, budgeting has been an annual event, yet transitioning this
towards a quarterly practice could help organizations respond to internal developments
and changes within markets in real time; there is a lot which can change within a year, an
idea which potentially causes budget stagnation and irrelevancy within that timeframe. Of
course, this comes with the caveat of understating that each organization is different, and
they need to implement a budget which fits the organizational needs; however, I do think
it is beneficial to consistently monitor budgets and adapt when it is called for. There is the
understanding of needing historical data to properly forecast, but implementing a rolling
forecast budget could potentially save the company money as well as ensuring the
organization is running as efficiently as designed. This idea would not be possible unless
clear budget procedures are identified, including both physical and non-physical
resources, and individuals are adequately equipped with what they require to complete
tasks successfully. Lastly, I think this enhances financial control as money is not being
treated as disposable income; this type of budgeting process has the potential to increase
transparency and accountability for all individuals affected by the budget.
Another concept would be enhancing and strengthening financial reporting, in addition to
internal processes. This not only assists in providing transparency to the stakeholders, but
it helps form a strong foundation for individual moral compasses. When there is
segregation of duties, with a divide and conquer mentality, there are natural checks and
balances implemented to ensure there is no occurrences of fraud all while reducing the
risk of errors based on a setup where there are multiple individuals monitoring the
financial reports. Another area to explore would be to implement some type of automated
financial system to streamline the financial process; an item which can lead to an
immediate increase in efficiency. I also must mention structure, regularly occurring audits;
coming from a financial background, having a schedule for both internal and external
audits helped evaluate the effectiveness of internal controls, as well as ensuring the
organization was in compliance with financial regulations and standards, and adapting to
any changes as needed. All in all, I think having strong financial reporting reduces the risk
of financial fraud or money mismanagement while also strengthening the reliability of
financial information when producing financial reports.
Both above examples were inspired by my previous place of employment, not only was it a
financial institution but also a state agency; therefore, we had to follow all financial
regulations and standards as well as North Dakota Century Code and state laws as
required. The budgeting topic I proposed above is not something an organization I have
been a part of does, however, the state agency would continuously monitor the budget
and it was regularly discussed. That thought process came more from a personal note of
how I do not necessarily understand how organizations can go an entire year without
analyzing their budgets, it needs to be a living breathing document, not just something you
look at once a year and then forget about for the entirety of the year. The second talking
point of financial reporting was something I was heavily accustomed too and was what we
lived and breathed at the bank; so, all of that is second nature to me and when I hear of
organizations not properly reporting their financials, I go a little crazy as I do not
understand how that is a way organizations and individuals operate within the financial
world.
References
Antony, A. (2020). Behavioral finance and portfolio management: Review of theory and
literature. Journal of Public Affairs (14723891), 20(2), 1–7. https://doiorg.ezproxy.umary.edu/10.1002/pa.1996
Fromlet, H. (2001). Behavioral Finance-Theory and Practical Application. Business
Economics, 36(3), 63.
Vardia, S., Soni, R., & Saluja, R. (2021). Investor Perception and the Role of Behavioral
Finance in Investment Decisions. IUP Journal of Applied Finance, 27(1), 5–24. (Elesha)
Discussion 2
Prompt 1: Provide an in-depth overview of Behavioral Finance and its relationship with
Organizational Effectiveness. Consider managerial decision-making and human bias
when formulating your response. Appraise how organizational leaders make the
financial decisions that are in the organization’s best interest.
Behavioral finance is area of focus on the impacts of psychological elements on
financial decision making (Antony, 2020; Brooks & Byrne, 2008; De Bondt et al., 2008;
Frankfurter & McGoun, 2002; Fromlet, 2001). This area of study is the counter to
traditional finance theories where it is believed that individuals and organizations make
sound decisions based off quantitative data rather than their feelings and emotions.
Behavioral finance also entails various fields of study including investment, financial
regulations, and organizational decision making. In fact, with respect to organizational
studies, there is a line of similarities that can be drawn between behavioral finance and
organizational effectiveness. For the purposes of this discussion, three elements will be
drawn from behavioral finance and used to support impacts to organizational
effectiveness.
Risk
For organizations, identifying risks is a critical element to ensure organizational
effectiveness is supported and sustained (Antony, 2020; Brooks & Byrne, 2008; Fromlet,
2001; Ricciardi, 2008). In an overarching view behavior financial has an increased level of
risk as the feelings and emotions drive how individuals respond to their environments.
With regards to organizations riding by the “seat of their pants”, this inherently increases
one’s risk level. For example, an organization that understand behavioral finance might
realize in negotiations that the emotions of winning a certain contract are driving the
conversation, while those who do not recognize behavioral finance might continue the
negotiations driving the margins of the product down. Inherently organizational
effectiveness is impacted by behavioral finance tendencies good and bad. Take for
example our organization that uses behaviors to drive decision-making. These types of
organizations may see a decrease in overall effectiveness as the behaviors ebb and flow
during the course of the organization (Brooks & Byrne, 2008; Hartnell et al., 2011;
Ricciardi, 2008; Shefrin & Statman, 2011). On the other hand, organizations that
recognize that behaviors are driving financial decisions may used vetted data sets to
better understand their situation and make a more informed decision.
Inefficiencies Within the Market
Behavioral ebbs and flows increase the level of inefficiencies within the market
(Brooks & Byrne, 2008; Hartnell et al., 2011; Ricciardi, 2008). Take for example, an
organization places a large contract with another organization at a lower selling price. The
selling organization uses this contract to leverage sales at a higher price to support the
low margin of the large contract. While this could be temporary in nature, a significant
price increase can bring with it a loss of customers due to the cost or prohibit entry of the
selling organization into a new marketspace. Had the selling organization understood
behavioral finance they would have realized that the short-term goal would not outweigh
the long-term effects of decision. While this example might be oversimplified in the
context of market inefficiencies, the point remains that behaviors of individuals impact
the marketspace on a regular basis. Lastly regarding organizational effectiveness, market
inefficiencies prohibit a regular task completion schedule as organizations and individuals
are forced to continuously change their work efforts due to the inefficiencies that are
born from behavior elements (Hartnell et al., 2011).
Artificial Intelligence
Behavior based financial models/decisions can be reduced when artificial
intelligence is used (Antony, 2020; Brooks & Byrne, 2008). While behavior-based models
use emotions and feelings to drive financial impacts, the ability of some artificial
intelligence models allow a go between pure traditional finance theories and behaviorbased models. For example, artificial intelligence allows for increase amount of
information symmetry between buyers and sellers. While exemplifying a more efficient
market it also improves organizational effectiveness. Tasks can be more easily
accomplished in a timely manner and increases the amount of tasks organizations can take
on.
Prompt 2: Apprise the best management practices of financial resource management
within the organization context. Discuss and propose a minimum of two best
organizational fiscal management best practices. Provide an example of how the best
practices could be applied to an organization in which you are directly involved or have
been involved in the past.
Financial resource management surrounds the systems and processes that are
established to not only measure financial performance but also resources, risk
management, and strategic planning (Antony, 2020; Brooks & Byrne, 2008; Fromlet,
2001; Ricciardi, 2008). While there are various avenues to support financial resource
management such as Enterprise Resource Planning (ERP) tools, the intent is to
understand and make sound decisions that support the business. For purposes of this
discussion, ERP and strategic planning are two best practices an organization can use to
support future success. For example, ERP tools allow organizations to see various aspects
of the business from the “boiler room to the board room” and allows the organization to
gain understanding of their current cost structure. On the other side, strategic planning
allows for the organization to grow and foster in an ever-changing environment. Without
a present-day view of the organization, the ability to effectively plan for growth is
substantially reduced.
References
Antony, A. (2020). Behavioral finance and portfolio management: Review of theory and
literature. Journal of Public Affairs, 20(2), e1996.
Brooks, M., & Byrne, A. (2008). Behavioral finance: Theories and evidence. The Research
Foundation of CFA Institute. University of Edinburgh.
De Bondt, W. F., Muradoglu, Y. G., Shefrin, H., & Staikouras, S. K. (2008). Behavioral
finance: Quo vadis?. Journal of Applied Finance (Formerly Financial Practice and
Education), 18(2).
Frankfurter, G. M., & McGoun, E. G. (2002). Resistance is futile: the assimilation of
behavioral finance. Journal of Economic Behavior & Organization, 48(4), 375-389.
Fromlet, H. (2001). Theory and Practical Application. Business Economics, 63.
Ricciardi, V. (2008). The psychology of risk: The behavioral finance perspective.
Hartnell, C. A., Ou, A. Y., & Kinicki, A. (2011). Organizational culture and organizational
effectiveness: a meta-analytic investigation of the competing values framework’s
theoretical suppositions. Journal of applied psychology, 96(4), 677.
Shefrin, H., & Statman, M. (2011). Behavioral finance in the financial crisis: market
efficiency, Minsky, and Keynes. Santa Clara University, November. (Cory)