INTHEBLACK April/May 2024 - Magazine - Page 55
“Cognitive biases can lead to some potential distortions
in terms of how people approach their decision-making.”
Steven Asnicar, Diversity Australia
AS ONE OF THE MOST NOTORIOUS CASES
of accounting fraud in history, the Enron
scandal serves as a cautionary tale about
the importance of ethical leadership and
accountability. It also highlights the role
cognitive biases can play in decision-making
and how easily those biases can result in
a negative outcome.
The energy giant’s bankruptcy in 2001
was largely caused by aggressive accounting
techniques that had been used to hide debt
and inflate financial statements.
However, executives were also guilty
of confirmation bias, overconfidence
bias and anchoring bias, among others.
They selectively emphasised positive
information while downplaying negatives.
This fostered overconfidence about their
ability to maintain the company’s stock
price despite risky financial practices.
The artificially inflated financial
figures influenced the investors, analysts
and employees who relied on these
misleading benchmarks for financial
decisions. The reliance on benchmarks
is a form of anchoring bias.
While the Enron case is an extreme
example, cognitive biases can be found
in many businesses. If unchallenged, they
may lead to negative results. It is important
for accounting and finance professionals to
avoid slipping into biased decision-making.
COGNITIVE BIASES
Cognitive biases are natural and often automatic
mental processes that help people make quick
decisions and navigate the complexities of the
world. People use them every day, and, in some
situations, they can save time. However, cognitive
biases can become problematic when they lead
to irrational or incorrect decisions, reinforce
stereotypes or contribute to unethical behaviour.
Steven Asnicar, director at workplace
specialist firm Diversity Australia, says
cognitive bias in accounting can occur when
professionals unintentionally favour information
that aligns with their preconceived beliefs or
judgements, potentially compromising the
integrity of financial statements.
“Cognitive biases can lead to some potential
distortions in terms of how people approach
their decision-making,” Asnicar says.
Common biases include overconfidence bias,
confirmation bias, anchoring bias, sunk-cost
fallacy and groupthink.
“From a financial perspective, cognitive
biases should be recognised and managed
properly. No one is immune to them. It comes
back to accountability and people being
prepared to interrogate data properly and
seek external review,” he says.
CHALLENGE DECISION-MAKING
Given that cognitive biases are so risky, it
is important to try to mitigate the impact
of biased decisions.
Organisational psychologist Dr Amanda
Ferguson says the key to mitigation is to
continue to question your reasoning and
stay up-to-date with new research and
methodologies.
“Cognitive bias occurs as a result of taking a
shortcut. We are trying to reduce the complexity
of a decision, and when we need to act quickly,
we might go through a certain way of thinking
that we’ve used in the past,” Ferguson says.
“It is natural to create shortcuts because it
makes life easier, but the consequence of that
is that you’re not interrogating information
in the way you probably should be, because
you’re just defaulting to what your brain’s
telling you is the easiest way.
“To mitigate it resulting in a biased decision,
it is important to take the time to ruminate,
to try not to make decisions under pressure
and to get expert and outside independent
advice,” she says.
Most importantly, Ferguson says people need
to constantly challenge their own reasoning
and adopt a growth mindset. “Good workplace
psychosocial safety can help people recognise
that being open to learning is a good thing.
It can help identify where biases may be
influencing decisions and how to avoid that.”
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an INTHEBLACK
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challenges of
unethical business
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