Review Question 1.3

Define what is meant by 'theory' and explain how theory is useful. Do you think theory needs to be considered in accounting?

Review Question 1.7

Explain the role of research and how this relates to theory.

Case Study 1.1

ECONOMIC THEORIES THAT HAVE CHANGED US: EFFICIENT MARKETS AND BEHAVIOURAL FINANCE

1 Briefly outline the two theories that are explained in this article.

2 The article states that these theories prescribe opposite actions for investors. If you were considering investing in the share market, which theory would you follow? How did you decide?

3 Discuss whether you believe that these theories have any relevance to, or implications for, accounting or accountants?

4 The article states 'there are two things that never makes any sense: investing in a stock because you think it's a good company . . . or picking an industry that you think is going to do well'. Does this mean that you should invest in bad companies, or if the industry is doing poorly? Explain your answer.

5 Discuss how this article may illustrate the overall limitations of theories.