Homo economicus in accounting and finance: lessons from behavioral economics

Mainstream accounting and finance literature is upholding an image of humans who make rational decisions by evaluating risks and returns of all available alternatives. It traditionally transformed humans into economic subjects who will rationally weight advantage against disadvantage and rigidly pursue their own interests. These characteristics of human decision making are incorporated in the concept of homo economicus, which significantly impacted the way accounting and finance theory has been developed. The objective of this chapter is to critically discuss the concept of the homo economicus and its application in accounting and finance research, based on findings from behavioral economics. Specifically, it shows that (1) humans rely on heuristics and biases for decision making, and (2) that the information which participants on financial markets are supposed to interpret for their decision making is not neutral, unbiased and value-free. The chapter argues that both accounting and finance research could be enhanced by methods and findings from behavioral economics.