Accounting expertise and decision-making through the lens of Fuzzy-Trace Theory (FTT)

Fuzzy Trace Theory (FTT) states that with experience in a domain, experts base their decisions on the meaning of the information (gist) rather than the verbatim details, reflecting the use of domain knowledge. FTT studies demonstrate that experts and novices construct different levels of memory representation. Experts are more likely to construct gist-based representations, while novices focus more on verbatim content. However, the investigation of the interrelationships among professional expertise, levels of memory representation, and decision-making in quantitative domains (e.g., accounting) is understudied. Hence, I investigate whether, and under what conditions, accounting experts are more likely than novices to use gist-based rather than verbatim representations of numeric information to make financial decisions. The accounting context provides a strong test of the idea that even experts in quantitative domains, who have great deal of experience working with numbers, move from verbatim to gist-based representations with experience. In two experimental studies with different task-related memory and decision demands, accounting experts and novices evaluated sets of financial indicators for companies (e.g., profitability) along with respective benchmarks (e.g., industry averages, compare companies). Experiment 1 investigated the evaluation of several accounting/financial indicators of a single company against benchmark values, asking participants to judge the likelihood that this company experiences financial problems. Experiment 2 compared multiple companies in a portfolio to make investment recommendations. The studies investigated not only whether experts outperform novices in making financial decisions, but also addressed why (role of domain-knowledge in memory representations). Results from these two studies suggest that although gist memory was more accurate for both groups, experts were more accurate than novices in remembering the gist of the financial information, and conversely novices were more accurate than experts for verbatim memory. In both studies, experts were usually more accurate in their decisions (e.g., choosing the best investment based on valuation metrics in the portfolios) compared to novices. Furthermore, the results highlight the importance of domain-knowledge on gist memory accuracy beyond other domain-general abilities in processing numeric information (e.g., numeracy, general memory abilities). The findings contribute to theories of expertise, memory and decision-making, with implications for improving accounting education and management information systems (e.g., design effective decision aids and curriculum)