The Philosophy of Rationality in Economics

The Philosophy of Rationality in Economics Nikita Kohli The ways of being human are bound but infinite. -Larry Niven An Introduction There exists no single definition of Rationality, yet it forms the cornerstone of basal assumptions of standard models of economics. A sweeping glance of the concept however, elucidates one fact. Rationality deals in human behaviour, it aims to understand its motivations and predict future outcomes based on choices. Rife with contradictions and limitations analogous to the innate complexity of human nature, this theory has been repeated altered and manifests itself in different ways with the progression of time. Objectives: The primary objective of this paper is to qualitatively analyze economic literature and draw conclusions pertaining to the concept of rationality and its relevance in the world today. Literature Review This paper, as the title suggests, aims to examine the concept of rationality, its use both philosophically in the study of broad humanity as well as in its more specific application to economics and standard models of human behaviour. In order to gain an understanding of early texts exploring concepts of rationality, such as the works of Aristotle and, the author relied on interpretative papers such as those of Fred Miller (1984). Various original works of authors have been studied chronologically to enable a historic overview of the concept, eventually yielding to contemporary work, implications and applications to various phenomena. Notable repositories of information such as the Palgrave Dictionary of Economics and critical essays on the subject of Rationality (a collection edited by Bill Gerrard) have been accessed. The papers with their extensive reference lists gave the author insight into the vast literature focused on this specific subject. Reviews and critiques, and studies in retrospect of concepts have been perused to help put an idea from another time into contemporary perspective. PART 1 Rationality: A historical Analysis If one devalues rationality, the world tends to fall apart – Lars Von Trier The first mention of the concept of Rationality is seen in the work of Aristotle; who states that the human being has a rational principle and the ability to carry out rationally formulated projects. (Miller, 1984). ‘Homo Economicus’ or the ‘Economic Man’ was a term that first appeared in the work of J.S Mill who described man as ‘solely as a being who desires to possess wealth, and who is capable of judging the comparative efficacy of means for obtaining that end’. (Mill, 1844). This is the base of the most widespread assumption in economics – that man strives to only maximize his utility and satisfaction, and this trait, intrinsic to all men, is termed ‘rationality’. Jevons, the forbearer of mathematical economics propounded a quantitative measure of the utility function. In stressing on the concept of marginal utility, he put forth some basic tenets of the utility consumption theory, namely that economic agents derive utility by consumption of goods, and that they are rational, calculating maximisers. In attempting to ‘treat the economy as a  calculus  of pleasure and pain’, Jevons (1871) set the foundations for a paradigm of Economics, which was deeply rooted in individualistic theories of motivation and decisions. Von Mises (1949), in his seminal work on human nature and decision making, asserted that human action is ‘necessarily always rational’. His understanding of rationality, however, differed from that of his successors in the field of Economics. He believed that every human being acted in a way that furthered their self-interest and was to achieve some end goal. When viewed in pure subjectivity, no action can be termed irrational as every human being acts out of some motivation, thus making the action ‘rational’. Concepts of Rationality: A contemporary analysis All human behavior is scheduled and programmed through rationality.   Michael Foucault In the early 1960s, mathematical economist John Muth (considered the Father of the Rational Expectations Revolution in Economics) put forth a body of work that would leave on indelible mark on the rationality discourse. For the first time, a significant difference in economic analysis was made, that between ‘adaptive’ and ‘rational’ expectations. Muth’s work and the theory of Rational Expectations was considered iconoclastic at the time as it proposed a shift in knowledge processing, analysis and decision making. Neo-classical economics, as propounded by Friedman, Keynes and others dealt with systems and analysis using historical data. This was termed ‘adaptive’. Adaptive neo-classical theory forms the basis for many policy decisions, be in pump-priming investment or monetary contraction. Policy is created in keeping with past results and some common assumptions in economics – people will demand more when the government invests in the economy etc. In contrast, Rational Expectations take into view the whole economy, in its real-time functionality, and uses imbibes current information in its analysis. It propounds that ‘rational agents’ continuously update their information and take into account the whole system. As Muth (1961) asserts, ‘the economy does not waste information, and that expectations depend specifically on the structure of the entire system. In addition to this fundamental tenet, this school of thought also states that markets will always clear; prices will adjust to fluctuations in supply almost immediately. When this concept is extrapolated to encompass the macro economy, it is often stated that no government policy or exogenous shock can shake up the system. This is because of the existence of rational agents, who, using their knowledge of existing phenomenon, expect certain outcomes and adjust their course of action accordingly. For instance, in a recessionary period, sellers will not let their prices fall. They behave in this manner because they are aware of the current scenario and preempt government investment intervention to attenuate falling demand. Thus they expect their demand to rise in the near future. As Greg Egan would put it, ‘It all adds up to normality’. While implicit in the Rational Expectations theory is the existence of perfect knowledge, transmuting into rational decisions, there emerged a field of study which emphasized the shortcomings of knowledge and information acquisition. The term ‘Bounded Rationality’ was introduced by Herbert Simon in his book Models of Man (1957). While in spirit adhering to the belief that human beings are rational, Simon’s theory observed a critical failing; that of the assumption of complete information. In this structure, human behaviour is viewed not in terms of rational, utility maximizing behaviour. Instead, it is seen as a series of actions, often not compatible with each other, decisions taken in situations of partial information and based on limited reflection. This accounts for the limitations to both knowledge and cognitive capacity. Taking this idea further, simmering in the field of human behaviour vis a vis economic processes, is the belief that human beings can sometimes be ‘Irrational’. Carrying out specific studies in this area, economist Dan Ariely finds surprising results. In a given situation, a person may make a choice which will not benefit them in the future, may not help them immediately, and the decision is made in the light of these two eventualities. Ariely explains that this is because human behaviour is not always controlled by rational motives, it is highly impulse driven and impacted heavily by exogenous factors. In the early 1960s, Gary Becker put forth the same idea; only that he believed even irrational agents can work ‘smoothly as a single unit’. Human irrationality, he states, was in fact rational. PART 2 – NUANCES OF RATIONALITY Amartya Sen anchors a clear distinction in the approaches to Rationality in literature. He divides them into two broad categories – Instrumental Rationality and Substantive Rationality. Substantive rationality is when one acts out of objectively, independently defined self interest. This lends itself to the General Equilibrium theory, the starting point of individual behaviour is a predefined utility function, and choice arises from this within the constraints imposed. Instrumental rationality dons a more humane approach wherein it allows for objectives that are not restricted to solely self-interest. This methodology acknowledges the influence of other factors on rationality. Sociologist Max Weber states a similar idea; that of Wertrationalor value/belief-oriented rationality, wherein the motives for action are often driven by reasons intrinsic to a particular actor, such as specific emotions, societal or spiritual aspects. Daniel Kahneman and Amos Tversky have made important contributions to the understanding of rationality and reactions to choice. The Prospect theory attempts to describe decisions under uncertainty. It empirically proves that a decision making process is often not rational; people are risk-averse when they stand to incur losses and risk-taking when they stand to gain. Another obstacle to ‘rational’ thinking is the problems posed by ‘heuristics’ (Kahneman Tversky, 1974). Heuristics are mental short-cuts, which usually involve focusing on one part of a complex problem and often ignoring the larger, more complete set of information. This limited perception of the issue at hand is used to make a decision. In any sphere of study, the influence of external social factors cannot be denied, on a superficial level, this impact could manifest itself in the way of the ‘Demonstration’ or ‘Bandwagon’ effect. On deeper examination, we see that these exogenous factors often define an individual’s sense of Rationality, which leads us to realize that Rationality can never be completely objective or homogenously innate to all. Adopting a pragmatic approach to the limitations posed by imperfect knowledge, Herbert Simon proposes the term ‘satisficing’. He pointed out that human beings lack the cognitive resources tooptimize: the relevant probabilities of outcomes are usually, thus the evaluation of all outcomes with sufficient precision is rare, if not impossible. A more realistic approach to rationality takes into account these limitations. An important application of the rationality principle in neo-classical economic theory is in the analyses of perfect competition. Competitive equilibrium is said to have been reached when each person maximizes their utility, given a certain set of assumptions (no externalities). This state of equilibrium will tend towards Pareto Optimality as it is assumed that the Pareto Optimal state is one where there is perfectly competitive equilibrium at a given set of prices and some initial distribution of resources. Every rational utility maximizer is in equilibrium, wherein no one can be made better off without hurting another’s well-being and current status. This basal assumption of rational behaviour establishes the relationship between the aforementioned concepts. PART 3: CONCLUSION In everything, one thing is impossible: rationality – Nietshchze This paper has attempted to shed light upon the various dimensions of rationality, as depicted in economic phenomenon. Problems arise however, with the implicit assumption of rationality in models involving human behaviour in varied situations. Rationality implies comprehensive knowledge of the current economic system, which is then factored into the decision making process. In keeping with the ‘Efficient Market Hypothesis’, markets will always correct themselves and clear as people are able to adapt and adjust to fluctuations almost immediately, due to their information. It has also been argued that natural processes of elimination ensure that rationality perpetuates itself, where those who act ‘rationally’ work optimally. This can be seen in nature, in the principle of ‘survival of the fittest’. Milton Friedman also draws this parallel to markets, where non-profit maximizing firms are driven to a wall so that only the ‘rational’, profit maximizing firms may survive. (Friedman, 1953). These applications and assumptions are rife with shortfalls. The first limitation is that of ‘knowledge’. Acquisition of this perfect knowledge to facilitate rationality is expensive, consumes resources, and in many cases proves impossible to obtain. To assume that perfect knowledge is a prerequisite for rational behaviour limits its scope. While looking at markets and macro-structures, one can see rational expectations as the underlying force in stock markets. These markets are extremely sensitive to minor fluctuations and react almost instantaneously to restore equilibrium. The same cannot be said of the economy. It is impossible to expect policy to change, or its impact to be as versatile as is seen in the stock markets. The case of the rupee depreciation illustrates this point, wherein the stock markets adjust to the disturbance, but the economy is left flagging. Chamberlin points out, that for Perfectly Competitive equilibrium to exist, there at first must exist a certain measure of disequilibrium. He states that not merely pure, but perfect competition is requisite for the rationality hypotheses can have their full power. The existence of the initial disequilibrium, in conditions of complete rationality, proves to be contradictory. Another limitation of the rationality assumption is that it makes for models that are normative, rather positive. Formally and explicitly, these provide frameworks to understand how agents should act in order to maximize their self interest. This fails in its predictive capacity, to see how one will behave in the future. We’re all mad here – Cheshire Cat, Alice in Wonderland Rationality is assumed to be highly centered on the individual. But as Kenneth Arrow 1986) points out, rationality gathers not only its force, but very meaning from the social context in which it is embedded. It holds only under ideal conditions, the nature of which is not seen in the world today. Adam Smith in the Theory of Moral Sentiments attributes actions to not only self-interest, but more humane factors like love, benevolence and community feeling. A science taking into account human behaviour must closely study its major drivers. Exposure to various social factors and upbringing influences the way people think. Defining rationality becomes problematic, what is rational to one may be deemed irrational to another. For instance, faith, religious belief, personal opinions and ideology are not universal in their impact and acceptance. Rationality then becomes extremely contextual; one person’s rationality is bound to not hold in another person’s situation. Rationality can also be temporal, due to the lack of accurate information about the future; what holds true today or in the immediate foreseeable future, may not hold in the long-run. The limits and bounds to rational thinking are not clear and universal, they’re morphed and moulded and coloured by personal experiences and biases. A crucial distinction needs to be made about what kind of behaviour is rational and what is not, and what models of behaviour may be useful in predicting actual behaviour. Taking into account various individualities poses a great challenge, but to attribute motivation and action to perfect rationality, especially in the context of subjective human behaviour, is problematic. Anomalies will be patent to the process of fitting human nature and motives into an objective framework. The author concludes that an assumption about human beings, especially one as pervasive as assumed rationality, is dangerous. At the same time, accounting for individual drivers is nearly impossible. Policy, and core economic theory must be able to account for, at the very least acknowledge, these discrepancies. This is the only way to create frameworks which may work with greater precision. REFERENCES Arrow, K. J. (1986). Rationality of self and others in an economic system.  Journal of Business, S385-S399. Friedman, M. (1953). The methodology of positive economics.  The Philosophy of economics: an anthology,2, 180-213. Heap, H.S (1993) Post Modernity and New Conceptions of Rationality in Economics. In The Economics of Rationality. (pp. 48-60). Routledge Jevons, W. S. (1871).  The Theory of Political Economy. Macmillan and Company. Kahneman, D. (1994). New challenges to the rationality assumption.  Journal of Institutional and Theoretical Economics (JITE)/Zeitschrift fà ¼r die gesamte Staatswissenschaft, 18-36. Kahneman, D. (2003). Maps of bounded rationality: Psychology for behavioral economics.  The American economic review,  93(5), 1449-1475. List, J. A. (2004). Neoclassical theory versus prospect theory: Evidence from the marketplace.  Econometrica,  72(2), 615-625. Mill, J. S., Backhouse, R. E. (1997).  On the Definition of Political Economy; and of the Method of Investigation Proper to it: Essays on Some Unsettled Questions of Political Economy (1844); On the Logic of the Moral Sciences: A System of Logic (1856)(Vol. 1). Routledge. Miller, F. D. (1984). Aristotle on Rationality in Action. The Review of Metaphysics, 499-520.s Muth, J. F. (1961). Rational expectations and the theory of price movements.Econometrica: Journal of the Econometric Society, 315-335. Sen, A. (2000). Reason before identity.  Romanes Lecture. Sen, A. K. (1977). Rational fools: A critique of the behavioral foundations of economic theory.  Philosophy Public Affairs,  6(4), 317-344. Stewart, S. A. (2005). Can behavioral economics save us from ourselves?.  University of Chicago magazine, 97(3). Swidler, A. (1973). The concept of rationality in the work of Max Weber.  Sociological Inquiry, 43(1), 35-42. Tetlock, P. E., Mellers, B. A. (2002). The great rationality debate.  Psychological Science, 13(1), 94-99. Tversky, A., Kahneman, D. (1974). Judgment under uncertainty: Heuristics and biases.  science,  185(4157), 1124-1131. Tversky, A., Kahneman, D. (1986). Rational choice and the framing of decisions. Journal of business, S251-S278. Von Mises, L., Greaves, B. B. (1949). Human action (pp. 59-62). Liberty Fund. Webliography Future Prospects. (2013, Aug, 5). retrieved September 1 2013, from The Economist Web Site: http://www.economist.com/blogs/freeexchange/2013/08/prospect-theory-and-economics Rethinking Thinking. (1999, Dec, 16). retrieved September 1 2013, from The Economist Web Site: http://www.economist.com/node/268946

The Australian Financial Review Essay

INTRODUCTION This assignment aims to present in a clear and concise manner our viewpoint towards remuneration disclosure, considering steps to improve this matter of contention is taken voluntarily by the boards as recently stated by The Australian Financial Review. Section I explains our disposition about amendments done concerning disclosing remunerations. Financial accounting principle theories utilised, along with published printed information came to our conclusion which suggests executive pay reports simplification is substantial to shareholders understanding of remuneration outline. Section II takes up voluntary remuneration disclosure and its likely consequences applying IASB Conceptual Framework of qualitative characteristics. Analytical thinking and apprehension lead us to conclude that an increase in participation over the matter results to a much better comprehension from the shareholders. Section III logically analyses the argument about share based payment having to cost the company anything or not. Upon critical evaluation of published views, adding our sensible and sound judgment, the process itself of issuing share options consumes resources, meaning that, it falls down as an expenditure. The motivation to improve remuneration disclosure Literature Review A fierce debate is raging about the legitimacy of executive pay rises. The evidence is mixed about how efficient remuneration disclosure has been, but what is clear is that the responsibility to ensure it is appropriate resides with the boards, and that there is a need for greater shareholder participation (Fels, 2010). The Australian Securities and Investments Commission (ASIC) have called for companies to provide more clarity on remuneration arrangements for their directors and executives (Gibson, 2013). As a challenge, we will discuss and analyse the motivations to improve remuneration disclosure. The following are the reasons why there is a need to improve disclosure of executive pay: * Assessing the `efficiency’ of executive pay is consequently problematic. Many performance indicators used by companies are not publicly disclosed and risk preferences vary across companies and individuals (Fels, A. 2010). * There has been a widespread perception that executives have been re warded for failure or good luck – receiving rewards for rises in the share market price that had little to do with their contribution to company performance, and much to do with what was happening in global stock markets and asset valuations (Fels, A. 2010). * Boards voluntarily taking steps to improve remuneration disclosure by adding take home pay tables to annual reports are one step ahead of the game as demands for increased disclosure persist (Weggins, J. 2012). * Corporations and Market Advisory Committee (CAMAC) review the disclosure of executive pay reports and the report include providing more relevant information to shareholders, streamlining pay reports and disclosure of all termination payments for executives (Disclosure on Aust Exec`s Pay Need To Be Simplified: Report, 2011). * Boards are compensating for bonus cuts by inflating base pay and long term incentives. As share prices and earnings decline, board of directors keep changing the mix of cash, bonuses and s hort-term incentives. Long term incentives now account for a greater percentage of total pay than they have in previous years (Smith, M. 2012). * The desire to comply with legal and professional requirements. There could be benefits for the company in appearing to act responsibly by their employees and this could be deemed to be more important than acknowledging other social responsibilities of the company (Deegan, 2002). * An attempt to be an accountable or responsible company by reporting information voluntarily. Managers are likely to consider that stakeholders have a right to certain information, and that they should fulfil that entitlement despite the related costs (Donaldson and Preston, 1995). Analysis This paper provides an overview of the current debate and the theories that attempt to explain executive remuneration disclosure. Attention is given to underlying accounting theories such as Positive Accounting Theory, Normative Accounting Theory, Stakeholder Theory, Legitimacy Theory, Institutional Theory, Public Interest Theory, Capture Theory and Economic Interest Group Theory. We will now analyse motivations to improve remuneration disclosure using the theories of financial accounting. Accounting theories typically either explain or predict accounting practice or they stipulate unambiguous accounting practice. Positive Accounting Theory (PAT) aims to make good predictions of actual world events and convert them to accounting transactions. Its general objective is to understand and predict the choice of accounting policies across conflicting firms. It recognises that economic consequences exist. In relation to PAT, because there is a need to be efficient, the firm will want to min imise costs associated with the performance indicators used by the firm. PAT uses hypotheses around which its predictions are organised. One of the most utilised hypotheses is the bonus plan hypotheses. Companies with bonus plans choose accounting procedures that modify reported earnings from future periods to current period. In doing so, the company can increase their bonuses for the current period. There was a need to simplify pay reports to executives. The report`s current length and complexity can make it intricate for shareholders to understand and time-consuming on companies to prepare. It is important that remuneration report is easy to understand. It is vital for the shareholders to have all the information they need to be able to hold company directors to account (Disclosure on Aust Exec`s Pay Need To Be Simplified: Report, 2011). Simplifying remuneration report applies a Positive Accounting Theory wherein it explains what information the company will use and will not use for the shareholders. Stakeholder theory refers to the concerns of stakeholder power, and how the power impacts their ability to persuade the company into complying with the stakeholder’s demands. Stakeholder power is viewed as a function of the stakeholders’ degree of control over resources required by the company and how critical these resources are to the unrelenting viability of the company. (Voluntary Employee Disclosures in Australian Annual Reports Applying Ullmann’s Stakeholder Theory, 2011) Legitimacy Theory seeks to ensure that the company operates within their rules, bounds and norms. Company should attempt to ensure that their activities are perceived to be legitimate. Rewards given to the executives for failure or good luck indicates that they operate beyond the company`s norms. This append to the needed impr ovements for remuneration disclosure. If remuneration is disclosed properly to the public, such erroneous transactions will be avoided. Companies disclose actual take home pay for key management, irrespective of whether the remuneration was granted in the current or previous financial year (Weggins, J. 2012). Many companies have started providing the public how much money their executives are taking home. Public Interest Theory supplies regulations that respond to the demand of the public to correct inefficient and inequitable market practices. By disclosing actual take home pay helps the companies counter claim that executives are overpaid. The possible consequences of voluntary remuneration disclosure Literature Review In the aftermath of the global financial crisis (GFC), public interest ensured spotlight being thrown on the pay of the senior executives and its regulations (Morrow M. & Limnalong B., 2011). Remuneration disclosure has been progressively strengthened in Australia over the last quarter of a century. Before 1986, the only requirement for disclosure of remuneration was the combined total level of collective remuneration aid to all executives of a listed company (Fels, A., 2010). As motivations to improve remuneration disclosure are presented on the previous discussion, we are now looking at the consequences of voluntary remuneration disclosure and analyse the current practices: * Many Directors hold more than one directorship across a range of publicly listed, private and not-for-profit organizations (Fels, 2010). * There is also a possibility of entrenchment of incumbent directors. It is difficult for shareholders to work out whether an individual director is underperforming from the outside. Later we will also see how the current practices help address this issue (Fels, 2010). * Another consequence of voluntary remuneration disclosure is to have a ‘clubbish’ practice amongst the board. A clubbish practice occurs when boards declare that the maximum number of directors is the number of directors presently on the board when shareholders nominate a candidate (Fels, 2010). * Recent remuneration reforms which commenced on July 1st, 2011, were directed to improve shareholder trust, thus granting the board to concede with the compensation process and be held responsible for strategy and structure (Morrow & Limnalong, 2011). * Productivity Commission proposed a two strike rule intended to strengthen the non-binding shareholder vote, giving shareholders the opportunity to cast votes against a company’s director under special circumstances in an Annual General Meeting (Morrow & Limnalong, 2011). * The new law, in addition, was particularly structured to allow shareholders to have more say over the pay of senior executives and also so that the boards are better informed on remuneration dissemination that might result in a shareholder casting a negative vote (Morrow & Limnalong, 2011). * The use of remuneration consultants as a requirement by the new amendment charges a potential conflict of interest in which their existence provides advice to boards on their pay (Morrow & Limnalong, 2011). Analysis In this section, we will were to give analysis on the possible consequences we discussed earlier in our review using the qualitative characteristics in the IASB Conceptual Framework focusing mainly on relevance, reliability, comparability, verifiability, timeliness and understandability. The introduction of the two strikes rule implies that the boards might become more cautious to avoid difficulties with shareholders and remuneration consultant reinforces that conformity (Durkin & Tadros, 2012). Since we will be analysing the consequences in accordance with the IASB Conceptual Framework, we shall start at looking into the relevance of voluntary remuneration disclosure. ‘Remuneration issues are now taking up so much time that boards are in danger of neglecting other issues such as risk management and succession planning’. Also it makes it harder for the shareholders to work out whether an individual director is underperforming or over performing from the outside (Wiggins, 2012). As we have discussed, the importance of remuneration disclosures has been felt more since the GFC. ‘This recent financial crisis has increased the saliency of reliability concerns about fair value disclosures’. Examination of voluntary disclosures in audited financial statements shows clear unreliability towards the mandated fair value estimates (Blacconiere et al., 2011). In addition, it is difficult to find authenticity with voluntary remuneration disclosure, as to many Directors hold more than one directorship across a range of publicly listed, private and not-for-profit organizations. Hence we can conclude that reliability is very low with voluntary remuneration disclosure. Pay policy has been a major pre occupation and distraction in the past year as reported by Graham Bradley, chairman of Stockland and HSBC Australia and a former Business Council of Australia president (Bradley, 2012). Dean Paatsch, director and co-founder of governance and proxy firm Ownership Matters was quoted saying that without transparency, the bad practices of the past like outsized termination benefits, non-executive director retirement schemes, paying dividends on unvested shares and dodgy options valuations could easily return (Paatsch, 2012). We know that recent reforms were directed to improve shareholder trust, thus granting the board to concede with the compensation process and be held responsible for strategy and structure. Local executive pay trends do not constitute the kind of picture that lends itself to establishing simple casual links between executive greed and the financial crisis. Assessing the efficiency of executive pay is considered problematic. Many performance indicators used are not publicly disclosed. There are various forms of pay and different types of hurdles and they all have different effects on incentive. In practice, company prefers to adopt a combination of hurdles (Fels, 2010). This encourages the need for remuneration consultants as well, but is considered as a conflict of interest. In a study by Dr. Idlan Zakaria of the University of Essex published on March 2011, he stated that remuneration consultants have a significant positive effect on disclosure quantity but with no impact on disclosure quality. (Morrow & Limnalong, 2011). Along with this, ‘Remuneration committees are more time consuming and more complex than audit committees’ warned the chairman of Stockland, Graham Bradley (Durkin & Tadros, 2012). We know that remuneration calculation is a complicated process in itself and involvement of the shareholders would further complicate things in turn affecting the timeliness factor for both practices. Mr Pablo Berrutti, the head of responsible investment for Asia Pacific at Colonial First State Asset Management stated that ‘the introduction of the two-strikes rule had encouraged companies to spend more time discussing remuneration and corporate governance issues with investors (Wiggins, 2012). A huge amount of time is said to be spent on remuneration and less on strategy. Hence, we can see that voluntary disclosure is good in a timely manner in comparison to the recent practices. Pablo Berrutti also acknowledged that companies were receiving unclear and mixed messages from a number of sig nificant investors. Some of the investors wanted pay packages to be better aligned with shareholders interest which are less complex. We know that the new law allows the shareholders more say over the board regarding the matter thus, being more actively involved is a very important factor to be considered (Wiggins, 2012). Share-based payments did not cost the company anything? Literature Review As per AASB2, companies must value and record employee options granted as an expense in their financial statements. Previously, the share based payments was just recorded in the notes of the financial statements. Argument arises to whether share-based payments recorded as an expense did or did not cost the company anything. Asness (2004) strongly believes it is reasonable to recognise the employee share options as an expense. He discussed several aspects in his article to convince his readers that options must be expensed. He emphasises options are something of value and they will be exercised only when employees have more advantages than the shareholders. In his article, he rebutted that options do not have value until they are exercised. However, Ronen (2008) advocated that the expense of share based payments should be borne by the pre-existing shareholders rather than the company itself. He suggests the companies to adopt separate statement to record the cost of the share options separately. Suggested separate financial statements are â€Å"Corporation Income Statement†, â€Å"Statement of Cost and Benefits to Pre-existing Shareholders† and â€Å"Statement of Enterprise Income†. With this, he deliberately concludes that the share options granted to employees should not be an expense in the corporation. Similarly, Hagopian (2006) believes that it is not ideal to recognise the employee share options (ESO) as an expense in the financial statements. Logically, the shareholders who will reap the gain from an ESO must bear the cost by themselves as well. He mainly discussed the three basic reasons why ESO should not be expensed. First, ESO is a kind of â€Å"gain-sharing instrument†, which, by its nature, means it cannot be an expense of the granting entity. Second, the cost of it has already been fully accounted. Lastly, expensing ESOs cannot meet the expense definition in the standard accounting. Analysis There was a controversial issue on implementation of share based payment under AASB 2 since it had been released. Arguments emerged as to which expensing options do cost the company an entity or not at all. The supportive parties believe that share-based options will cost the company, signifying that, options are of valuable entity when the future market price is higher than the price exercised. The optionholders will put to use their options and thus take part of the company from the pre-existing shareholders at below-market prices. To some extent, the optionholders obtain something of value, which means an expense. In addition, if the company sells options to the outside investors, they have to pay cash for the options and the executives usually get options for free. This means issued options are an expense (Asness, 2004). Advocates likewise mention the cost of stock buyback program which is the real cost of employee options. In order to manage dilution, the company has to buy some shares back. Even if a company will not act on buyback shares, the earnings will still be reduced because of issuing options and dilution. Therefore, options have a certain value and should be recorded like regular salaries (Wayman, 2011). On the other hand, the opponent parties argue that share-based payment costs the business firms nothing. Instead, the shareholders will bear the cost of the share options by themselves. In fact, the shareholders will get extra value even after the cost of dilution (Ronen, 2008). They consider ESO a kind of ‘gain- sharing instruments’, which does not have a cost until there is a substance to accumulate. At the same time, the cost will be located where the related gain is. Since shareholders par take the benefits with the optionholders, the cost must be a portion of the stock appreciation. Hence, it cannot cost the granting entity (Hagopian, 2006). The Australian Venture Capital Association Limited (AVCAL) places their confidence on th e fact that there are improprieties in standards which includes ESO as an expense. For high growth unlisted companies, it is not an accurate method to value those firms because the securities of private companies are not trading on the open market; it is likely to misuse the models in the context of expensing ESOs. Therefore, the valuations cannot reflect actual costs to the company (Deegan 2012, p. 621). Based on our combined judgment, it is not reasonable and logical to say share-based payments did not cost the company anything. To a certain extent, it costs value to the resources of the company. The process of issuing share options and equally dividing it to the employees consumes resources in which, therefore is considered an expense for the company. For the option itself, it has certain value even if it is out of the money. Otherwise, it is impossible to be accepted by its employees. Employees get the share options for free whereas the outside investors have to pay the company cash to buy the options if the company issues the share options to outsiders, thus it would mean an apparent expense for the company. To counter this action, instead of allotting new options to employees, the company bought the options from the market and gave them to its employees. This further proves that it is the initial outlay of the option’s cost for the company (Asness 2004). Furthermore, when the options are utilised, the employees usually buy them at a discounted rate. Comparatively, the company will lose the opportunity to sell some of their stocks at the market value (Pirraglia, n.d.). Without a doubt the company has sacrificed some value for exchanging its employees’ service. Additionally, share-based options are type of compensation expense. Logically thinking, would the employees accept $1 less in their salary because of receiving the options? The answer is clear ly no. Hence, we have to admit that options are a substitute for salary (Asness, 2004). In remuneration disclosure, the government will require to provide a more accurate data including the shares and options executives in the remuneration reports (Durkin & Tadros, 2012). Therefore, it is impossible to realise aforementioned argument without having to pay out a single cent. CONCLUSION Remuneration pay for executives evolved into a delinquent juncture to those who seek a substance to blame for the disintegration of the world’s financial system following the global financial crisis. Demands for increased disclosure persisted causing the boards to make necessary actions to reform remuneration disclosure. In an attempt to explain executive remuneration disclosure, principled theories of financial accounting were applied as they have the ability to account for or express in advance a specific accounting practice. Attenuation of costs while remaining efficient in which, nowadays, is highly essential relates to Positive Accounting Theory. To attain this, applying the idea of Legitimacy Theory, properly disclosed remuneration as to public is seen to avoid faulty transactions. In accordance, acknowledging remuneration in the interest of the public marks a strategy to aid business firms to express that executives are given proper compensation. Carrying through to ref orms in disclosing executive remuneration, Stakeholder Theory is being adapted in the form of implying the recently approved two strikes rule in the financial system. This method is directed to give shareholders the capability to exhort power over remuneration issues. Amendment also allows the board to focus on compensation strategy and structure as what they are responsible for. Share-based payment entail companies to assess the fair and equal value of the employee stock options granted to employees and recognise it as an expense. Share-based payments match the service provided by employees with the expense of their compensation. Employee share-based options arguably cost value to the resources of the company. The process of issuing share options and company buy back elucidate the costs incurred. It is concluded that, a firm’s competitive edge lies in the business’ policy and strategy regarding remuneration thus drawing attention to confining key executives. Remunerat ion disclosure makes board of directors more accountable and supply information about company projections, and can thereby bolster investors. In line with this, top executives and ordinary employees are expected to perform at their best to justify the pay they are receiving. To have an accurate remuneration report, execution of appropriate accounting procedures and policies must be exercised. REFERENCE LIST Asness, CS 2004, ‘Stock Options and the Lying Liars Who Don’t Want to Expense Them’,Financial Analysts Journal, vol. 60, no. 4, pp.9-14, retrieved 25 April 2013,< http://ezproxy.deakin.edu.au/login?url=http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=14076750&site=ehost-live&scope=site> Blacconiere W.G., et al., 2011, ‘Are voluntary disclosures that disavow the reliability of mandated fair value information informative or opportunistic?’, Journal of Accounting and Economics, Volume 52, Issues 2–3, November 2011, Pages 235-251 . Bradley G, 2012, ‘Bring executive pay back to the boardroom’, Australian Financial Review, November 26, retrieved April 22, 2013. Deegan, C. (2000), Financial Accounting Theory, McGraw Hill Book Company, Sydney. Deegan,C. (2012), Australian Financial Accounting, McGraw-Hill Australia Pty Ltd, Sydney. `Disclosure on Aust Execs` Pay Need To Be Simplified: Report’ (2011, p. 1). Donaldson, T, and Preston, L (1995), â€Å"The stakeholder theory of the corporation – concepts, evidence, and implications†, Academy of Management Review, Vol. 20 No.1, pp. 65-92. Durkin, P & Tadros, E 2012, ‘Laws will target executive pay’, The Australian Financial Review, 26 November, p. 10. Durkin, P & Tadros, E., 2012, ‘More restraint as investors wield their new powers’, The Australian Financial Review, Executive Salaries 26 November, p. 20, viewed on April 26 2013. Fels, A., 2010, ‘Executive Remuneration in Australia’, Australian Accounting Review, 20,1,pp. 76-82, viewed on April 24 2013. Hagopian, K 2006, ‘Point of View: Expensing Employees Stock Options Is Improper Accounting’, California Management Review, vol.48, no.4, pp136-156, retrieved 21 April 2013, < http://ezproxy.deakin.edu.au/login?url=http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=21923221&site=ehost-live&scope=site> Morrow M. & Limnalong B., 2011, ‘New rules on executive pay’, Charter, 82(7), pp. 24-25, viewed on April 23 2013. Paatsch, D, 2012, ‘Exec Excess: Blame weak boards, not regulation’, Australian Financial Review, November 26, retrieved on April 21, 2013. Pirraglia, W 2013, ‘What Are the Benefits of Employee Stock Options for the Company?’, retrieved 28 April 2013,< http://smallbusiness.chron.com/benefits-employee-stock-options-company-2842.html> Rinen, J 2008, ‘Should Executive Options Be Expensed’, Journal of Accounting, Auditing&Finance, vol. 23, no. 3, pp.437-470, retrieved 21 April 2013, http://ezproxy.deakin.edu.au/login?url=http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=33064759&site=ehost-live&scope=site `Voluntary Employee Disclosures in Australian Annual Reports Applying Ullmann’s Stakeholder Theory’, (2011, p. 3-5) Wayman, R 2011, ‘The â€Å"True† Cost of Stock Options’, retrieved 22 April 2013, Wiggins, J., 2012, ‘Take-home disclosure is catching on’, The Australian Financial Review, November 26, p.21.

Instant Solutions to 5th Grade Essay Samples Evidence in Step by Step Format

Instant Solutions to 5th Grade Essay Samples Evidence in Step by Step Format The Upside to 5th Grade Essay Samples Evidence The most important point is, you don't need to wait until you find the prompt to come up with an arsenal of sorts of argument-building techniques you may use to back up your points. What are a few examples of fantastic attention grabbers for. Your grade will be dependent upon the standard and depth of your insights, and on the usage of specific textual evidence as support. Instead you would like to learn new material and set it in the suitable context. Ok, I Think I Understand 5th Grade Essay Samples Evidence, Now Tell Me About 5th Grade Essay Samples Evidence! Likewise, it has to be logically complete and express a particular idea. Proposed Solution In communities where immigrants compose a core portion of the demographic, it is critical to acknowledge the simple fact that said immigrants will inevitably affect the culture of the community. Just make certain that it is something which you require, not just something which you desire in the brief term. Within this city people appear different because everyone comes from various places. A Startling Fact about 5th Grade Essay Samples Evidence Uncovered Quotations A quotation is a specific preproduction of some other individual's words. Every essay followed the identical standard structure. When it may seem an argumentative essay isn't different than other kinds of papers, arguments have their own how to compose an essay in mla style. How can you write a great argumentative essay. Maybe you've written this form of essay before. The theory behind a persuasive essay is to assist the student pass their ideas through the audience. An individual can also use short quotations so as to sum up the argument. In such situations, you may use some lengthy quotation. Color-coding is an excellent aid for the teacher because you're able to skim to ensure all pieces of your students' paragraphs and essays are found. Paraphrasing If you take a section of text and set it in your own words, you're paraphrasing. The 3 body paragraphs are the basis of the essay. They are absolutely crucial to the success of the five paragraph essay. At times, the place of writer can be exceedingly important and capture the most important idea very well. As a discipline, writing requires a whole lot of practice, particularly in the essential stages like 5th grade. Describe one vivid memory with that day. In fifth grade students are in a position to write in a number of stylesthey may also write five related high quality paragraphs. If you need an example written by means of a student check out our vast selection of completely free student models. While teachers ought to be there to support your child, he should do the job. Students lead busy lives and frequently forget about an approaching deadline. There's, naturally, a limit on the range of pages even our finest writers can produce with a pressing deadline, but generally, we can satisfy all the clients seeking urgent assistance. Consequently, there's a need to institute policy changes that require healthcare staff to get training in another language along with on cultural competency for a method of ensuring they are closer with their patients. Even in the event the deadline is truly tight, feel free to get hold of our managers. When you review every one of your answers, keep an eye on your mistakes. In order to obtain the hearts of your readers, it's important to possess strong arguments. If you've been given the job of writing an evidence based essay, you will want to be aware of the best approaches to incorporate that evidence. After discovering our website, you will no longer will need to bother friends and family with these kinds of requests. Observe that the objective of a persuasive speech is just like the purpose for writing an argumentative or persuasive essaythe organizational structure and variety of data in a persuasive speech would be.

Teen Suicide in America Essay - 577 Words

5000 people under the age of 25 with 2000of those teenagers are dying each year, but not from cancer or car accidents, but by their own hands. These children have made the choice to take their lives by committing suicide. Andrea Young Ward explains how and why teens make the decision of taking their lives in her story â€Å"Many Factors Contribute to Teen Suicide†. Teen suicide is the third leading killer of teenagers and has increased 200% since 1960 and will probably continue to increase in the years to come. Teen suicide has many factors that contribute to this horrible death of so many teens. The main factors are feeling of hopelessness and alienation, homosexuality, concerns about AIDS, depression and many other problems. A†¦show more content†¦. . some of the reasons Tanya felt bad were that her father, with whom she had only recently dome into contact, died unexpectedly right her first attempt, a schoolmate had committed suicide two months before, and Tanya was also wrestling with an emerging awareness of her homosexuality.† Tanya had many reasons why she had wanted to commit suicide such homosexuality and probably depression about her father’s and schoolmate’s recent death. Many people try to take their lies all over the United States due to various reasons. As well as many factors there are also many preventions to stop teen suicide. Some of these factors are talking to a counselor, a guardian or parent, and many others. â€Å"Stephen Levi ne, author of Who Dies? and other books on death and dying, calls service the key to transforming suicidal thinking.† He thinks that a service that talks to people that have suicidal problems will help prevent people from committing suicide. â€Å"Levine says that many counselors add to teenager’s feelings of isolation by denying them.† He thinks that counselors just make teens who feel suicidal feel even worse. â€Å" ‘I would have liked for someone to talk to me not about not doing it, but about why I wanted to do it – to acknowledge that the feelings were there and try to figure out why they were there’ says Tanya.â€Å" â€Å"Heckler says ‘the number of suicides would be halved if people inShow MoreRelatedThe Epidemic of Teen Suicide in America Essay1156 Words   |  5 Pages   Ã‚  Ã‚  Ã‚  Ã‚  Every year, thousands of youth die in the United States, not by cancer, car accidents, and other diseases, but by their own hand. 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