Contents lists available at ScienceDirect Management Accounting Research journal homepage: www.elsevier.com/locate/mar Research paper The role of cognitive frames in combined decisions about risk and effort Karla Oblak, Mina Ličen, Sergeja Slapničar ⁎ University of Ljubljana, Faculty of Economics, Kardeljeva pl. 17, 1000 Ljubljana, Slovenia ARTICLE INFO JEL classification: M41 Keywords: Incentive scheme Framing Contract Bonus Penalty Fairness Effort Risk ABSTRACT Cognitive framing influences the subjective valuation of monetary payoffs and an individual’s willingness to exert effort and take risk. In this paper, we explore how cognitive frames created by incentive design and the outcome’s fairness influence decisions on risk and effort. While such decisions are often combined in practice, the theories that study risk-taking and motivation to exert effort remain discrete. We set up a multiperiod, 2 × 2 experiment in which we analyze the effects of a bonus versus a penalty contract and a fair versus an unfair outcome distribution. We use a modified Sternberg task to measure risk-effort decisions. We hypothesize that in the case of conflicting cues from the two frames, the cue that creates a perception of loss dominates the decision. We also hypothesize that over time, prior performance influences current decisions by creating a new cognitive frame. We find that if the pay is unfair, neither a bonus nor a penalty seems to matter. If it is fair, high risk-effort tasks are stimulated more by a penalty than a bonus contract. The effect of prior performance eventually outweighs the effect of both incentive manipulations. Our results help to advance the management accounting literature by integrating separate theories on risk-taking and effort exertion to better understand interactive cognitive frames in comprehensive decision-making. 1. Introduction Notable psychological theories stress that decision-making depends on an individual’s cognitive frames or mental representations of the decision problem (Birnberg et al., 2007). The design of incentive sys- tems has an important effect on cognitive frames that influence in- dividuals’ perception of fairness, their levels of aspiration, and whether they see outcomes as gains or losses. Two leading psychology theories - organizational justice theory (Adams, 1963, 1966) and prospect/ framing theory (Kahneman and Tversky, 1979; Kahneman, 2003) - propose that cognitive frames arise by comparing an outcome to a re- ference point. In organizational justice theory, the reference point re- presents a comparison with a relevant other, whereas in prospect theory the reference point is basically the status quo (Kahneman, 2003) and may be invoked by a variety of characteristics of the incentive system. An idea common to both theories is that reference points shape cog- nitive frames and that a deviation from them causes internal conflicts that individuals try to avoid (Birnberg et al., 2007). In more complex decision situations, individuals face several cognitive frames at the same time, and the question arises on which one plays a central role in decision-making and how they interact. Although the two theories share a profoundly related concept, it is interesting that they remain discrete: whereas the organizational justice theory applies reference values to decisions about motivation to exert effort without explicit consideration of the outcome risk, prospect theory uses them to predict risk-taking behavior (pure monetary payoffs in the absence of any effort). Yet, in practice, decisions about risk and effort are often simultaneous: in many settings individuals face an op- tion that requires a lot of effort, which potentially brings a high payoff, but the probability of obtaining that payoff depends on the success in completing the task. The alternative is to choose an easy option that requires little effort and has a high probability of success but results in a low payoff. Examples of these options are choosing between a more difficult or an easier field of study that leads to different future salary levels; between a demanding or a less demanding job with the corre- sponding pay levels and chances of success; between writing a scientific paper for a high impact journal or a low impact journal with the cor- responding effort, probabilities of success, and impact factors; choosing between highly uncertain but high-yielding projects in which a lot of effort and new knowledge has to be invested or certain low-yielding projects that require an average amount of work and acquired knowl- edge. The aim of this paper is to use both theories to establish which cognitive frames dominate in simultaneous decisions on risk and effort. The literatures on neuroscience, psychology (Hughes et al., 2015; Salamone et al., 1994; Treadway et al., 2015; Walton et al., 2006; Wardle et al., 2012), and animal behavior (Cocker et al., 2012; Hosking et al., 2014a,b) jointly examine the relation between risk and effort http://dx.doi.org/10.1016/j.mar.2017.07.001 Received 24 December 2015; Received in revised form 11 July 2017; Accepted 20 July 2017 ⁎ Corresponding author. E-mail addresses: karla.oblak@gmail.com (K. Oblak), mina.licen@ef.uni-lj.si (M. Ličen), sergeja.slapnicar@ef.uni-lj.si (S. Slapničar). Management Accounting Research xxx (xxxx) xxx–xxx 1044-5005/ © 2017 Elsevier Ltd. All rights reserved. Please cite this article as: Oblak, K., Management Accounting Research (2017), http://dx.doi.org/10.1016/j.mar.2017.07.001