Professional scepticism, or the lack of it, has long been acknowledged as a major issue in audit quality. But are the lessons being applied too narrowly? This is a fundamental skill for every finance professional, whether engaged in negotiating their way through the budgeting or planning process, or questioning the assumptions of colleagues in other functional areas, from production through to marketing.
The publication of ACCA's recent report Banishing Bias, only goes to reinforce this point. Although the report addresses audit work, the conclusions are profound for all of us.
As the report sensibly observes, professional scepticism is a state of mind which cannot be directly observed. To quote the report directly, "The sceptical state of mind feeds into judgements, which drive actions." But professional scepticism is rooted in the concept of objectivity, and that objectivity is impaired by our cognitive biases, which "account for the apparently non-rational ways in which people reach decisions."
So, what are these cognitive biases. The report identifies 12 that are most relevant to auditors. However, a quick scan through confirms to me that there isn't one that I haven't been guilty of at some stage when putting plans and forecasts together for various business I have been involved with:
Hindsight bias
Once people know that something has happened, they overestimate how easy it should have been to predict it.
Outcome bias
People judge the value of an action or intervention on the basis of its outcome rather than on whether it appeared reasonable at the time. While similar to hindsight bias, outcome bias is distinct from it.
Confirmation bias
Confirmation bias is the phenomenon whereby people tend to value evidence that corroborates their existing beliefs more highly than evidence that contradicts them.
Anchoring bias
People tend to use an initial piece of information as an 'anchor' against which subsequent information is judged.
Availability heuristic
People overestimate the importance of information that is available to them.
Groupthink
Groups tend to coalesce around an idea rather than challenging and questioning it. This has been attributed to the innate desire for unity and conformity in social situations. Groupthink can be exacerbated in groups where the leader reveals his/her preferences.
Overconfidence
People tend to believe their abilities and judgements are better than they are.
Recency
People overemphasise the importance of more recent information.
Conjunction bias
People tend to think of specific circumstances as being more probable than general ones. For example, in some situations, people value insurance for a specific type of risk, eg the risk to aircraft from terrorism, much more highly than insurance over a wide range of risks, including the specific risks in question (Eisner and Strotz 1961).
Selective perception
Observers' expectations influence how they observe the world.
Stereotyping
Stereotyping is the tendency to put people into groups and then assign the group’s qualities to individuals in the group.
Blind-spot bias
Blind-spot bias is the view that 'everyone is biased except for me'. While there’s no evidence that this directly undermines rationality, it can affect an individual’s susceptibility to other forms of cognitive bias.
I think if I was pushed to pick one, I would have to say that the one I am most guilty of would be Confirmation bias.
What about you?
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