Question

Describe one type of cognitive bias (one or two sentences). Provide at least one specific example of how this type of bias could lead to suboptimal accounting decision making.

Answer 1

Meaning of cognitive bias

A cognitive bias is a systematic error in human thinking that affects the decisions and judgments made by the people. Some of these biases are related to memory and some of these bias related to problems with attention.

types of cognitive bias

there are almost 25 types of cognitive bias.

in these type one common type of bias is confirmation bias.

This is favoring information that conforms to your existing beliefs and discounting evidence that does not conform.

accounting is a mixture of science and art. in accounting decision making accountant uses evidences and formulas to calculate figures for decision making. but on the other hand accountant uses his intelligence to frame assumptions. confirmation bias leads human to pay attention or accept only those things in which he beliefs and not on things which are different from his believe system.

confirmation bias arise when people analyse or read about the companies in which they are already invested in rather than gathering new information. they will tend to interpret information in the ways that conforms their beliefs. so they do not want to understand the evidences or they simply ignore them so their investment loss money.