When Betrayal Aversion Meets Loss Aversion: The Effects of Changes in Economic Conditions on Internal Control System Choices

Abstract

ABSTRACT Previous academic research has documented that people experience disutility from potentially being exploited by others beyond what this exploitation may do to their wealth. Such a tendency is labeled as the demand for accountability in accounting, and the psychology behind this phenomenon is labeled more broadly as betrayal aversion in other fields such as sociology. Since the environment is not static for a decision maker, it is important to understand not only that betrayal aversion exists but also how/if its impact on individual decision making varies in response to environmental changes. In this study, we investigate if changed economic conditions (i.e., an economic downturn or upturn) would affect the level of betrayal aversion and its impact on a principal's internal control system choices. The results of our experiment suggest that while the level of betrayal aversion does not change with changed economic conditions, its relative importance on a principal's control system choice decreases (does not change) in an economic downturn (upturn). These findings are consistent with the notion that loss aversion dominates betrayal aversion in control system choices when decision makers are facing an economic downturn. This study suggests that the initial decision motivated by betrayal aversion cannot be assumed to be unaltered when the environment changes.