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The Effects of Monetary Incentives on Effort and Decision Performance: The Role of Cognitive Characteristics

Vidya Awasthi and Jamie Pratt
The Accounting Review
Vol. 65, No. 4 (Oct., 1990), pp. 797-811
Stable URL: http://www.jstor.org/stable/247651
Page Count: 15
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The Effects of Monetary Incentives on Effort and Decision Performance: The Role of Cognitive Characteristics
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Abstract

Much accounting research is based on the premise that monetary rewards are used to direct and control individual actions. The assumption is that such rewards motivate individuals to exert additional effort and achieve higher levels of performance. Several studies have recently shown that the effects of monetary incentives on judgment and effort are contingent on a number of factors. In this study the contingent factors used are the cognitive characteristics of the decision maker. The cognitive characteristic under examination is perceptual differentiation (PD), an individual's ability to perceptually abstract from a complex setting certain familiar concepts or relationships. The experimental tasks involve applying three decision rules frequently used in accounting settings: conjunction probability, sample size, and sunk cost. In the development of the hypotheses, PD is posited to relate positively to decision performance, and monetary incentives are expected to induce all subjects to exert additional effort, but to increase the performance levels of only those who possess the requisite cognitive skill. Seventy full-time undergraduate students at a major U.S. university voluntarily participated in the experiment. All subjects received a one dollar participation fee, and one half of them (incentive condition) were given an opportunity to win an additional six dollars. The subjects first completed the Group Embedded Figures Test, which provided scores used to classify them as high and low PDs. The subjects then responded to a series of questions to test their understanding of the conjunction probability, sample size, and sunk cost decision rules as well as their ability to apply these rules in three different accounting settings: an estimate of past due accounts receivable, an evaluation of internal control, and a fixed asset replacement. The results indicated that high PDs performed better than low PDs only in the decision context where conjunction probability was applied. No differences in performance were observed between high and low PDs in the contexts requiring the application of sample size and sunk cost. Error rates in the sample size and sunk cost contexts exceeded those of conjunction probability, and high PDs showed a greater understanding than did low PDs of the sunk cost decision rule. The subgroup of subjects offered a monetary incentive spent significantly more time on the tasks than subjects not offered the incentive. In the low PDs, monetary incentives were not associated with higher levels of performance across all three decision contexts. In the high PDs, monetary incentives were associated with higher levels of performance in the contexts that required applications of the conjunction probability and sample size decision rules. The contributions of the study include (1) demonstrating that the effectiveness of a monetary incentive may depend on the cognitive skill of the decision maker, and (2) extending the research on the role of PD in decisions made in accounting contexts.

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