FAT week 3 - FAT Lecture 3 Decision usefulness approach =>...

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FAT Lecture 3 Decision usefulness approach => If can’t prepare theoretically correct (ideal) statements, at least make existing statements as useful as possible => Understand how financial info is made ‘decision useful’ in financial markets -> better able to guide content of financial reports How would you make an inv decision? 1. Specify states (high/low performance) 2. Specify prob. of states of high/low performance 3. Specify payoffs conditional on states 4. Specify risk 5. Gather info? Update priors? 6. Decide! Decision usefulness approach => Investor’s responsibility to make inv decisions => Role of financial reporting: supply info that is useful for this purpose => To prepare useful info, accountant must know investors’ decision needs => Understanding of how investors make decisions helps accountant to know their decision needs Role of Rational Decision Theory Model => Helps us understand how f.s. info helps investors to make inv decisions => Captures average investor behavior? (X imply all individuals make decisions as theory suggests) Single Person Decision Theory
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=> Formal model of rational decision making under uncertainty => Info = evidence that has potential to affect individual’s decision => Models how decision-makers update subjective beliefs about future payoffs of decisions (obtain new info, access credibility; enables a robust understanding of decision
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