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Managers may rely on emotional reactions to a setting to the detriment of economic considerations (\"System 1 processing\"), resulting in decisions that are costly for firms. While economic theory prescribes performance-based incentives to align goals and induce effort, psychology theory suggests that the salience of emotions is difficult to overcome without also inducing more deliberate consideration of both emotional and economic factors (\"System 2 processing\"). We link these perspectives by investigating whether performance-based incentives mitigate the costly influence of emotion by inducing more System 2 processing. Using functional magnetic resonance imaging and traditional experiments, we investigate managers' brain activity and choices under fixed wage and performance-based contracts. Under both, brain regions associated with System 1 processing are more active when emotion is present. Relative to fixed wage contracts, performance-based contracts induce System 2 processing in emotional contexts beyond that observed absent emotion, and decrease the proportion of economically costly choices.

Online labor markets allow rapid recruitment of large numbers of workers for very low pay. Although online workers are often used as research participants, there is little evidence that they are motivated to make costly choices to forgo wealth or leisure that are often central to addressing accounting research questions. Thus, we investigate the validity of using online workers as a proxy for non-experts when accounting research designs use more demanding tasks than these workers typically complete. Three experiments examine the costly choices of online workers relative to student research participants. We find that online workers are at least as willing as students to make costly choices, even at significantly lower wages. We also find that online workers are sensitive to performance-based wages, which are just as effective in inducing high effort as high fixed wages. We discuss implications of our results for conducting accounting research with online workers.

Emotional and economic incentives often conflict in decision environments. To make economically desirable decisions then, deliberative neural processes must be engaged to regulate automatic emotional reactions. In this functional magnetic resonance imaging (fMRI) study, we evaluated how fixed wage (FW) incentives and performance-based (PB) financial incentives, in which pay is proportional to outcome, differentially regulate positive and negative emotional reactions to hypothetical colleagues that conflicted with the economics of available alternatives. Neural activity from FW to PB incentive contexts decreased for positive emotional stimuli but increased for negative stimuli in middle temporal, insula, and medial prefrontal regions. In addition, PB incentives further induced greater responses to negative than positive emotional decisions in the frontal and anterior cingulate regions involved in emotion regulation. Greater response to positive than negative emotional features in these regions also correlated with lower frequencies of economically desirable choices. Our findings suggest that whereas positive emotion regulation involves a reduction of responses in valence representation regions, negative emotion regulation additionally engages brain regions for deliberative processing and signaling of incongruous events.

We use a multi-period production task to experimentally examine whether communication about causal linkages between actions today and performance tomorrow improves employee effort allocations and firm performance. We base our predictions on melioration theory, which anticipates that employees will allocate effort as though causal linkages were not there. We find that, absent communication about causal linkages, one-third of participants allocate effort without regard to causal linkages. Communicating qualitative information about linkages significantly improves effort allocations and performance. Communicating quantitative information about the linkage is no more beneficial than communicating qualitative information. Our results have implications for firms examining the benefits and costs of developing, validating, and quantifying causal linkages between performance measures, and they provide important evidence about how melioration theory can be extended to a rich context. [PUBLICATION ABSTRACT]

Employee stock options (ESOs) are often used to compensate employees other than top executives; however, ESOs are complex and not well understood by employees. In a study of 210 ESO recipients from five companies, Financial Planning found employees often value their own options based on simple mental shortcuts, or anchors, that make subjectively judging value easy, but they typically misestimate the true value of ESOs. Options are exercised in the future, so a judgment that incorporates the time value of money leads to higher quality, and often higher dollar, estimates of their value. Using actual employees subjective estimates of the value of their ESO holdings, they show companies can influence subjective variations of stock options by educating employees about valuation techniques that incorporate the time value of money In an experiment using graduate business students who value hypothetical ESOs, they demonstrate that the type of training provided to employees matters.

\"The Religion of Socrates\" by Mark L. McPherran is reviewed.

Working Paper No. 20949 This paper examines heterogeneity in the responsiveness to default options in a large state retirement plan, focusing on individuals' decision-making approaches as well as their economic and demographic characteristics. Using a survey of plan participants, we find that procrastination and the need for cognitive closure are important determinants of the likelihood of default. We also explore an important implication of defaulting - individuals who default are significantly more likely to subsequently express a desire to enroll in a different plan. The desire to change plans is also correlated with numerous economic and decision-making characteristics, including procrastination.