How evolution delivered us accountants

Last updated 05:00 03/07/2009

One must bear in mind about tax
If it walks like a duck and it quacks
It's a duck that you see and so will IRD
Unless IRD's being lax.

The limerick above won its New Zealand author a bottle of Bombay Sapphire Gin. From memory, he worked for Ernst & Young.

Before writing about economics, I published a weekly column about accountancy. No slur is intended upon the noble profession of accountancy, but writing a weekly column on the subject is hard slog, which is why prizes of booze were offered for the best poetry by a bean-counter. You had to fill up the column somehow.

Accountancy is again of interest because some academic practitioners are straying into social science. It is a well-trammelled path. The failure of classical economics to credibly explain the irrational function of markets has led economists to turn to two new fields: Neuro-economics and behavioural economics.

The latter perhaps provides greater insight to explain the interaction of markets and their participants. A quick example: aversion to economic inequality is genetic, not only in humans but primates, too.

To test this, two groups of monkeys were given cucumbers to eat. When the second group was upgraded to grapes, the cucumber-eaters (the poorly paid) went on a hunger strike. A rational economic decision would have been to continue to eat your greens and express dissatisfaction in other ways. But rather than put up with the inequity, the cucumber-eaters preferred to starve. Anybody been on a picket line lately?

Abacasus Neuro-economics, by contrast, is the specific study of brain function when people make economic decisions. One paper looked at the preference for Coke over Pepsi. People couldn't tell the difference in blind tasting but MRI scans showed the area of the brain associated with processing rewards (the ventromedial prefrontal cortex) became active during drinking. But when presented with a Coke bottle (even when it contained Pepsi), areas of the brain associated with emotional response, such as the hippocampus, lit up. There was a big preference for the red-and-white logo. The idea of Coke over-rode test subjects' taste.

The neural response in relation to accountancy is the subject of a paper by emeritus professor of accountancy at the University of Minnesota, John Dickhaut, and others. It seeks to prove that "culturally evolved'' accounting practices are linked to the evolution of the human brain.

It is a no-brainer to suggest the architecture of the brain has developed and changed to accommodate the intellectual requirements of modern life. A study of London taxi drivers showed they had an enlarged hippocampus, which is also used for navigating three-dimensional space.

But to suggest, as the authors do, that accountancy has influenced the evolutionary development of the brain is a much bolder claim. Their's is an extension of earlier work suggesting buying and selling stuff in increasingly complex ways generates "an explicit demand for the brain'' to reorganise in explicable ways.

Human endeavour, particularly reciprocal exchange, has provided the foundations on which modern economies are built. Dickhaut argues that part of the evolutionary structure resulted from the need to better exploit these inherit instincts to barter for mutual gain.

Accounting, in simple or complex forms, is an integral part of that exchange. Basic social norms, particularly the conception of fairness, require a way of measuring all the buying and selling. In a Darwinian sense, institutions of measurement (accountancy) that better correspond to the brain's system of rewarding successful buying and selling are more likely to survive.

The neural foundation of the brain's conception of fairness and trust is fascinating. Two areas of the brain light up when an investor does business with a trustee, let's say, disgraced financier Bernie Madoff. When Madoff pays you back (remembering you don't know he's using new investor money), the neural firing lights up those areas of the brain earlier than it did in previous trades. This indicates what Dickhaut calls "an intention to trust'' and anticipates future successful trades. When the ponzi scheme unravels, neurons fire in other areas of the brain to signal the investor's surprise and distress.

Modern accountancy, of course, is an external record superceding brain memory "in a way that renders them permanent and less subject to manipulation or memory failure''. Dickhaut's point is that accountancy mimics basic brain functions corresponding to buying and selling decisions. Trade has its roots in the human brain and it is this, they say, that suggests the ledgers of profit and loss, income and debt, are evolutionary functions.

The full report is at: http://papers.ssrn.com/sol3/papers.cfm?abstractid=1336526

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