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Many people wonder whether human beings actually comprehend what and how firms report about their financials, such as sales and profits. In an increasingly complex world of financial information, it is crucial to understand which type of financial information the human brain can best process. Apart from analysts and investors, insights into fundamental human demands for financial information may also inform policy makers with a view to amending current standards and regulation to better align with the natural capacities of human information processing.

Sebastian Hoffmann (University of Edinburgh Business School) together with (University of California, San Diego) embrace a developmental psychology approach to study 'unspoiled human demands' for financial information. They are interested in determining which type of financial information humans would prefer if they were free to choose. In order to eliminate conventional views on what financial information is and to abstract from commonly discussed concepts and schemes, we focus on the study of children and their appreciation and processing of financial information. This allows for an exploration of the 'purest' demand and processing of such data, because children are the least socially imprinted.

Using a game-like experimental setting which represents investment opportunities in businesses, we examine whether children react to conventional financial information as mandated by accounting standards and related regulation. Asking them about their experiences during the game and inviting them to share the rationales for the choices they made allows insights into their decision-making processes. It further facilitates an assessment as to which information is more or less relevant, if any at all.

While the study is still ongoing, it transpires that the appreciation of conventional financial information depends on age. More specifically, the ability of children to handle numerals and being able to solve basic counting problems facilitate their deliberate, informed decision-making. Furthermore, it appears that less complex financial information is preferred when assessing businesses’ investment potential.

The next steps of the project will explore in more detail the age thresholds that determine which financial information is useful for information processing. Afterwards, the study design will be amended to allow the children to specify which information they wish to have before making an investment decision. Our preliminary results may be informative for investors and firms, and how they present or use financial information. The study’s further evolution should be particularly relevant for policy makers as they will reveal which information the human brain actually needs to make informed assessments of corporate performance.

If you wish to learn more about this exciting research, please get in touch with Sebastian Hoffmann.