Question

the concept of professional judgement making informed decisions about country circumstances underpins the accounting profession. discuss how heuristics decision making with reference to specific judgement that are typically made?

Answer 1

Answer :

Heuristics are simple strategies or mental processes that humans, animals, organizations and machines use to quickly form judgments, make decisions, and find solutions to complex problems. This happens when an individual focuses on the most relevant aspects of a problem or situation to formulate a solution. Some heuristics are more applicable and useful than others depending on the situation. Heuristic processes are used to find the answers and solutions that are most likely to work or be correct. However, heuristics are not always right or the most accurate. While they can differ from answers given by logic and probability, judgments and decisions based on a heuristic can be good enough to satisfy a need. They are meant to serve as quick mental references for everyday experiences and decisions. In situations of uncertainty, where information is incomplete, heuristics allow for the less-is-more effect, in which less information leads to greater accuracy. Heuristics play important roles in both problem-solving and decision-making. When we are trying to solve a problem or make a decision, we often turn to these mental shortcuts when we need a quick solution. Psychologists have suggested a few different theories for the reasons that we rely on heuristics.

• Attribute substitution: Theories suggest people substitute simpler but related questions in place of more complex and difficult questions.
• Effort reduction: According to this theory, people utilize heuristics as a type of cognitive laziness. Heuristics reduce the mental effort required to make choices and decisions.
• Fast and frugal: Still other theories argue that heuristics are actually more accurate than they are biased.  In other words, we use heuristics because they are fast and usually correct.

The world is full of information, yet our brains are only capable of processing a certain amount. If you tried to analyze every single aspect of every situation or decision, you would never get anything done.

In order to cope with the tremendous amount of information we encounter and to speed up the decision-making process, the brain relies on these mental strategies to simplify things so we don't have to spend endless amounts of time analyzing every detail.

You probably make hundreds or even thousands of decisions every day. What should you have for breakfast? What should you wear today? Should you drive or take the bus? Should you go out for drinks later with your co-workers? The list of decisions you make each day is endless and varied. Fortunately, heuristics allow you to make such decisions with relative ease without a great deal of agonizing.

For example, when trying to decide if you should drive or ride the bus to work, you might suddenly remember that there is road construction along the bus route. You realize that this might slow the bus and cause you to be late for work. So you leave earlier and drive to work on an alternate route. Heuristics allow you to think through the possible outcomes quickly and arrive at a solution.

Accounting and auditing judgment:

As accounting in the US moves toward the adoption of international accounting standards, which aims to be more principles than rules-based, the significance and frequency of judgments in decision-making and their financial statement consequences will increase. According to Riahi-Belkaoui (2004), early studies in probabilistic judgments in the accounting literature made similar conclusions as Kahneman and Tversky concerning the use of simplifying heuristics, but with the additional insight that the use of heuristics may be sensitive to task and situation variables. Riahi-Belkaoui observes that research on the departures from normative decision-making behavior has seized on heuristics and biases – essentially, representativeness in auditing, anchoring in auditing, anchoring in management control, and anchoring in financial analysis. After reviewing the behavioral auditing literature Shanteau finds that accounting researchers frequently have difficulty in translating the findings of Kahneman and Tversky into an auditing framework. Another observation is that the reported results of many studies are often close to normative, and even when the reported findings complies with heuristics and biases, the effects are smaller than those reported by Kahneman and Tversky. A third observation is that there seems to be a tendency within this bulk of literature to define success or failure of a study by whether biases are observed or not. A final observation is there has been a tendency in auditing studies of heuristics and biases to cite framing effects to account for the generally inclusive results.

Types of Heuristics : Some common heuristics include the availability heuristic and the representativeness heuristic.

Availability

The availability heuristic involves making decisions based upon how easy it is to bring something to mind. When you are trying to make a decision, you might quickly remember a number of relevant examples. Since these are more readily available in your memory, you will likely judge these outcomes as being more common or frequently-occurring. For example, if you are thinking of flying and suddenly think of a number of recent airline accidents, you might feel like air travel is too dangerous and decide to travel by car instead. Because those examples of air disasters came to mind so easily, the availability heuristic leads you to think that plane crashes are more common than they really are.

Representative

The representativeness heuristic involves making a decision by comparing the present situation to the most representative mental prototype. When you are trying to decide if someone is trustworthy, you might compare aspects of the individual to other mental examples you hold. A sweet older woman might remind you of your grandmother, so you might immediately assume that she is kind, gentle and trustworthy. If you meet someone who is into yoga, spiritual healing and aromatherapy you might immediately assume that she works as a holistic healer rather than something like a school teacher or nurse. Because her traits match up to your mental prototype of a holistic healer, the representativeness heuristic causes you to classify her as more likely to work in that profession.

Affect

The affect heuristic involves making choices that are influenced by the emotions that an individual is experiencing at that moment. For example, research has shown that people are more likely to see decisions as having benefits and lower risks when they are in a positive mood. Negative emotions, on the other hand, lead people to focus on the potential downsides of a decision rather than the possible benefits.

How Heuristics Can Lead to Bias

While heuristics can speed up our problem and the decision-making process, they can introduce errors. As you saw in the examples above, heuristics can lead to inaccurate judgments about how common things occur and about how representative certain things may be. Just because something has worked in the past does not mean that it will work again, and relying on an existing heuristic can make it difficult to see alternative solutions or come up with new ideas. Heuristics can also contribute to things such as stereotypes and prejudice. Because people use mental shortcuts to classify and categorize people, they often overlook more relevant information and create stereotyped categorizations that are not in tune with reality.

Heuristics help make life easier and allow us to make quick decisions that are usually pretty accurate. Being aware of how these heuristics work as well as the potential biases they introduce might help you make better and more accurate decisions.