I’m not trained in behavioral economics, but I recognize the potential that this research methodology can have on standard setting.  Recently, the Miller paper was informally discussed among some FASB staff as to whether it might have implications for the FASB’s disclosure framework project.  That discussion is the impetus for this post, which requests information from all of you behavioral economists out there (and anybody else who has something to add).

Disclosure overload is a pervasive complaint received by the FASB and the hope is that one outcome of the disclosure framework project will be fewer disclosures (although this is not the overriding objective).  I doubt the FASB would subscribe to a notion that disclosures should be limited based on any one individual’s ability to process; put many individuals together to form a market and it would seem that the limitations of any one individual can be mitigated or even eliminated by the market.  Further, I know from experience that valuation, bankruptcy prediction, earnings management, and other types of models used in practice often employ more than seven pieces of information.  However, the Miller paper might still have implications for standard setting.  As an example, might the research evidence suggest a limit on the level of disaggregation provided to financial statement users?  In prior standards, the FASB has reduced proposed disclosures because users expressed their opinion that the smaller information set would be easier to read and understand.

Perhaps even more important than the level of disclosure is questions related to formatting and organization of information.  Is there research available since 1956 that provides evidence on how human capacity to process information is affected by how the information is formatted and/or organized?

Replies and comments to this post that refer to research with implications on the following issues would be very useful to the FASB:

1)      How much information can be effectively processed by individuals or markets?

2)      Why types of format and/or organization maximize the usefulness of information?]]>