Learning what cognitive bias is and how to recognise it

Cognitive biases are mental shortcuts that we develop based on past experience and the ways we apply our knowledge. When we’re overwhelmed with lots of information and need to be able to make decisions quickly, it’s helpful to be able to rely on a mental shortcut. Sometimes this process serves us well, helping us make good, speedy decisions. Sometimes, however, it doesn’t. Many biases are deeply emotional and often unconscious.

How you can battle bias

As an accountant, you’re in a unique position to help companies avoid the pitfalls of cognitive bias. With a handle on the actual numbers involved, you can provide a dispassionate, evidence-based view – a crucial element of any project. Once you understand the most common cognitive biases that can lead to financial mistakes – and how to recognise them in yourself and others – you can take steps to help your company or clients avoid them.

Optimism bias

What it means:

You have an idea that you’re convinced will work, even in the face of evidence to the contrary. Or you are so sure of your skills that you’re certain your prediction will be correct, despite the facts.

Why it can be a problem:

When people have this bias they can really persist with a project, and that can mean businesses end up throwing good money after bad ideas simply because those involved don’t believe they could have got it wrong,” says business psychologist Binna Kandola. “This can result in big losses. This failure to accept you’ve got it wrong can also mean you don’t learn from mistakes, which can be detrimental to the future of the business.”

The solution:

“Encourage the team to stick to facts and keep reviewing the original plan,” says Kandola. “At some point in the project planning stage, there should have been a decision to take a certain step if things went badly. That decision would have been made when everyone was less emotionally involved. The more that’s been put into a project the harder it is to let it go, but trust the plan that was made. It’s also important that those in charge take feedback on board and adapt their processes.”

Confirmation bias

What it means:

You look for evidence that supports your views and beliefs and filter out anything that doesn’t.

Why it can be a problem:

“Quite simply, it can lead to bad financial decisions because people are failing to look at all the data,” says Kandola. At Lehman Brothers, senior management ignored their chief risk officer’s warnings in the run-up to the 2008 financial crisis because her view of the facts didn’t align with their beliefs.

The solution:

“It’s vital to work in a team with people who have different perspectives and different sets of expertise, so everyone is coming at a problem from a different point of view,” says Kandola.

Conformity bias

What it means:

The larger group influences thinking, even if their views don’t fit with the evidence, and individuals fail to use their own judgement.

Why it can be a problem:

This bias can lead to groupthink, whereby there’s a culture within a company in which dissenting views are shut down. This can mean businesses become close-minded about opportunities and fail to spot potential problems. “At Lehman, those who spoke out about risk were ridiculed before being fired,” Kandola points out.

The solution:

“It can be difficult to challenge senior management if yours is the only dissenting voice and you’re being disregarded,” says Kandola. “It can often be helpful to turn to someone else on the team, share your views and try to get them on side”.

Present bias

What it means:

“This is the belief that whatever is going on now is how it will continue to be,” says Kandola. “Looking at the crash of 2008, house prices in the US had only dropped by a maximum of 5% since the Great Depression of the 1930s. So people assumed they’d never go lower than that.”

Why it can be a problem:

This bias can make businesses vastly over-optimistic when things are going well and can lead to a failure to spot potential financial risks. Conversely, when business is going badly, present bias can lead to excessive caution and an unwillingness to be creative.

The solution:

Encourage your team to see the bigger picture and think more broadly. It can be helpful to ask some ‘What if’ questions. What would happen if the situation were different? This sort of question can help decision-makers develop a more lateral way of thinking.

Summary:

As humans we are prone to unconscious bias. But becoming aware of what these biases are and how they effect your every day decision making can improve your effeciveness at work. As an accountant with a handle on the numbers, you can provide a dispassionate, evidence-based view – a crucial element of any project. For more on biases and inclusion in the workplace:

Charlotte Haigh is a contributor for AAT's members magazine, AT.

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