Chapter 3 – Problem 18
a) Let the probability of state 1 (the high performance state) be P(H) = 0.5

Let the probability of state 2 (the low performance state) be
P(L) = 0.5

We assume that the amount of utility or satisfaction Ajay derives from a payoff is equal to the square root of the amount of the payoff.

So, we get
Ui(a) = √x, x≥0
Where x is the amount of the payoff

The decision theory tells us that the act with the highest expected utility should be chosen.

We denote the expected utility of act a1 (AB Ltd.) by EU(a1) and the expected utility of act a2 (XY Ltd.) by EU(a2).

Thus, we get
EU(a1) = 0.5 x √1089 + 0.5 x √0 = 16.5
EU(a2) = 0.5 x √324 + 0.5 x √196 = 16

∴ Ajay should choose act a1 and invest in AB Ltd. since it has the higher utility

b) To calculate prior state probabilities, we use Bayes’ Theorem. So the posterior probability of the high performance state is
P(H│GN) = P(H)P(GN│H) / P(H)P(GN│H) + P(L)P(GN│L)
where
P(H│GN) is posterior probability of high state given good news F/S P(H) is prior probability of high state
P(GN│H) is probability F/S shows good news in high state
P(L) is prior probability of low state
P(GN│L) is probability F/S shows good news in low state
Thus, from Bayes’ Theorem, we get
P(H│GN) = (0.5 x 0.6) / [(0.5 x 0.6) + (0.5 x 0.5)] = 0.55
Then Ajay’s posterior probability of the low performance state is
P(L│GN) = 1 - 0.55 = 0.45
So the expected utility of each act based on Ajay’s prior probabilities is
EU(a1) = 0.5 x √1089 + 0.5 x √0 = 16.5
EU(a2) = 0.55 x √324 + 0.45 x √196 = 16.2

∴ Ajay should still choose a1 and invest in AB Ltd. since it has the higher expected utility.

c) Given this new information system, the posterior probability performance of high state is P(H│GN) = (0.5 x 0.8) / [(0.5 x 0.8) + (0.5 x 0.2)] = 0.8
So, the posterior probability performance of low state is
P(L│GN) = 1 – 0.8 = 0.2
Then the expected utility of each act is...

...BUS310 ACCOUNTINGTHEORY AND ACCOUNTABILITY
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A theory is primarily meant to explain or predict an event, behaviour or outcome. Proponents of a...

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Watts and Zimmerman (1986) defined Pat as a theory that seeks to explain and predicts particular phenomenon. It is concerned with explaining accounting practice. The three basic hypotheses as outlined by Watts and Zimmerman (1978) underlying PAT are:
1. Bonus plan hypothesis:
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Deductive reasoning entails a valid argument in which it is impossible to assert the premises and to deny the conclusion without contradicting oneself.
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Introduction – theories of...

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appropriate.
The purpose of this essay is to provide an overview of positive accountingtheory (PAT) and highlight how this theory differs to normative accountingtheory. Definitions and assumptions of both...

...AccountingTheory Construction
The function to study accountingtheories is to classify them according to the assumptions they rely on, how they were formulated, and their approaches to explaining and predicting actual events. There are some classification which are pragmatic, syntactic, semantic, normative, positive, and naturalistic approaches.
Pragmatic approaches are based on observing the behavior of accountants or those who use...

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Personal Theory
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Throughout my experience my current course, Theories and Practices: Human Services in Criminal Justice, I have learned plenty of information about the various theories of psychotherapy in counseling. Some of these theories operate on the basis of recognizing...

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