The influence of attributions and budget emphasis on framing and risk preferences under conditions of unfavorable budget variances

The purpose of this study is to examine the influence of causal attributions and budget emphasis on individuals' framing perceptions and risk preferences under conditions of unfavorable budget variances. Prospect theory maintains that risk preferences are domain-specific; individuals tend to be risk-averse in gains and risk-seeking in losses. Prior accounting research has found that while individual actions clearly reflect prospect theory propositions during situations of gain, individuals demonstrate risk indifference when faced with situations of loss. We investigate potential explanations for this lack of strict adherence to prospect theory during situations of loss. Our study uses internal and external attributions and pressure to meet budget targets for performance appraisals to create salient loss conditions. The results demonstrate that budget decisions vary depending on the casual factors of the unfavorable variance and on the degree of emphasis placed on achieving time budget targets. As expected, subjects exhibited relatively more risk seeking behavior when faced with internal attributions and when they expected a greater emphasis on meeting budgetary goals in performance assessment. Our results also demonstrate the importance of controlling for framing effects in prospect theory related tests.