Cognitive biases are found in many businesses. Probably the most extreme example in recent history is the Enron case. Beyond the aggressive accounting techniques the org used to hide debt and inflate their financial statements, executives also fell victim to multiple cognitive biases. These biases made them overconfident in the business despite risky financial practices. 

While cognitive bias is not uncommon, if it’s left unchallenged especially in accounting, it can prove disastrous for the business.

A Crash Course on Cognitive Bias

Cognitive biases are predictable, typically emotionally-based, pathways that deviate from objective standards of thinking. The brain often relies on them to make quick decisions, but due to their unconscious and emotional nature, they can lead to problematic issues with reasoning. 

Key characteristics of cognitive biases include:

• They tend to occur without any conscious awareness that they are happening based on a certain situation or environment that triggers them
• They usually follow predictable and consistent patterns based on how an individual recalls information
• Personal viewpoints and emotions are typically the basis for cognitive biases

According to organizational psychologist Dr. Amanda Ferguson, “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.” 

“It is natural to create shortcuts because it makes life easier,” Ferguson continues, “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.” 

She adds that challenging one’s own reasoning and maintaining a growth mindset will help you remember that being open to learning is in fact a good thing.

Cognitive Biases in Accounting

When it comes to accounting, the concept of cognitive biases is very similar—and can be just as detrimental. Just like in other parts of life, the decisions of accountants and finance professionals can be influenced by blind spots in an individual’s perception. The impacts of this can be far and wide, skewing the company financials and analysis, resulting in incorrect audits and decisions. 

Common cognitive biases found in accounting include: 

• Confirmation Bias: Ignoring information that is contradictory to preexisting notions. This can cause the accounting professional to miss errors or inaccuracies. 
• Overconfidence Bias: Placing too much emphasis on existing knowledge, causing a lack of verification or incomplete analysis.
• Anchoring Bias: Leaning too much on a prior year or starting number even when further analysis demonstrates the number is incorrect.  
• Availability Bias: Putting more emphasis on data that is remembered more readily or easily, rather than what is most up-to-date or relevant. 

Being aware of having cognitive biases and putting steps in place to mitigate them is critical for accuracy in accounting tasks. If left unaddressed the audit process and compliance will remain vulnerable. Accountants can also overestimate or underestimate expenses and/or revenue, calling financial statements into question. 

The Impact of Cognitive Bias in Business

Just how deeply do cognitive biases impact businesses? Consider that of the original Fortune 500 list, only 49 companies are still on the list. What happened to the other 451? Part of it is that they did not skillfully adapt to mounting risks and disruptors. J.P. Morgan theorizes that these once highly-respected orgs let cognitive and emotional biases cloud decision-making to a degree that the businesses could not form effective and timely counter-strategies.

It’s a painful lesson that 451 of those Fortune 500 businesses had to learn. Still, other orgs can take lessons from those experiences and instead build strategies that will uncover and counteract cognitive and emotional biases before they become a problem. 

On the Lookout for Cognitive Biases

So how can a professional overcome cognitive bias? The solution is multi-threaded, combining being aware of the bias in the first place, then introducing more structured tasks and processes that stand up to biases that may occur, and finally, being disciplined enough to follow through on the processes outlined. 

Take a look at these practical strategies:

• Introduce or Increase Education and Training
  • Accountants and auditors need to be made aware of what cognitive biases are, how common they are, and how decisions can be skewed by them using practical examples. 
• Encourage Professional Skepticism 
  • Any data source, assumption or data representation should be questioned and checked. 
• When Making Decisions, Use Structured Methodology Wherever Possible
  • If an accounting professional has a checklist, framework, or model to follow for decision making, it allows them discontinue relying on intuition or previous patterns. 
  • If possible, involve more people in the decision to reduce the risk of individual assumptions or influence. 
• Swap Roles and Tasks
  • Allowing an individual to work in a different role or on a different task introduces a new perspective and a way to potentially discover problems that someone else may have missed. 

Data Can Defend Against Cognitive Bias

What doesn’t have emotion in any of the financial reporting game is data. Thus, using data-driven strategies and data analytics is quite effective in helping overcome cognitive biases. 

Enhanced Accuracy: Data analytics can automate calculations and identify patterns that are not readily uncovered by the human eye. You’ll have improved data consistency and more accurate, dependable financial reports.

Real-Time Insights: No need to rely on outdated information. Data analytics opens up access to real-time data with a dynamic video of financial performance. This means leadership can perform more timely decision-making even as the market conditions regularly change.

Risk Management: Identify and mitigate risks by analyzing datasets and highlighting threats through data analysis. The result will be better informed decisions and limited risk exposure.

Increased Compliance: Real-time information from data ensure compliance by identifying potential issues so they can quickly be resolved. 

Improve Data Analytics (and Cognitive Biases) with Help from ExtendInsights

Fortunately, there are several tools available to finance teams that can help offset the weight of cognitive biases. Data integration can play a key role by ensuring reports are always filled with to-the-moment information for informed decision-making. Increased confidence in the data empowers leadership to plan based on what’s real and accurate, and less on biases and gut feelings. 

That’s one of the many reasons we built ExtendInsights, a direct integration app that connects data sources like NetSuite, HubSpot, Salesforce, Google Analytics, and more to Excel for both data analytics through automated reporting and data management with upload and writeback features* to ensure systems are updated with the most accurate data for reporting and analytics. Dynamic connections ensure teams and execs alike can refresh Excel reports to reflect real-time numbers on a regularly scheduled basis or on demand with a single click. 

Cognitive biases are inevitable when humans are making decisions, but they don’t have to drive business outcomes. Using data to build an accurate and bias-aware story will help overcome biases and support informed, rational decisions. 

See how ExtendInsights can fight cognitive biases in your org with a free two-week trial. 

 

* Upload and writeback currently available for NetSuite and Salesforce only