The Effects of Accounting Knowledge and Context on the Omission of Opportunity Costs in Resource Allocation Decisions

This paper uses a laboratory experiment to investigate the joint influence of accounting knowledge and decision context on the tendency of decision makers to ignore opportunity costs in resource allocation decisions. In the experiment, accounting knowledge was measured in two ways: discretely and continuously. The discrete measure classified subjects into high- and low-accounting knowledge categories based upon the program of graduate business study in which the subjects were enrolled. The continuous measure was the number of accounting courses the subjects had completed. Decision context was a manipulated variable. Subjects were presented with a resource allocation decision in either a business or a personal context. The experimental design randomized context treatments and controlled for the potential effect of analytical ability on performance. The experiment produced the counter-intuitive result that high-accounting knowledge interferes with a decision maker's ability to incorporate opportunity costs into a business decision, but such knowledge does not interfere with a decision maker's ability to factor opportunity costs into a personal decision. In particular, the results indicate that the number of opportunity costs ignored by subjects in a business resource allocation decision is greater for subjects with high-accounting knowledge than for subjects with low-accounting knowledge. The experiment also indicates that subjects with high-accounting knowledge ignore a greater number of opportunity costs when the decision is posed in a business context than when it is posed in a personal context. Finally, ex-post analyses show that the experiment's findings are robust to differences in the subjects' maximization objective for the resource allocation task.