Tax Considerations in Investment Strategies: Evidence of Functional Fixation on Asset Depreciation

Abstract

Tax planning strategies may encourage functional fixation on tax considerations in investment decisions. A desire to reduce income taxes payable may result in the irrational purchase of assets in order to keep depreciation on the income statement. In this case, fixation on tax, which is suggested by past literature involving functional fixation (Haka, Friedman, and Jones, 1986), could lead to sub-optimal decision-making in settings where after-tax income maximization would be the appropriate response. A controlled experiment was performed using M.B.A. students from a southwestern university. The presence or absence of information encouraging the development of a tax "frame" was the manipulated variable. The results support fixation on tax effects given a framing difference. In addition, a declining incidence of tax fixation was observed to correspond with years of business experience.