Heuristics and Biases: Analysis of Decision-Making in Auditing Context

This essay examines various heuristics and biases, including anchoring and adjustment, representative heuristic, availability heuristic, selection bias, and loss aversion, and their impact on decision-making processes, particularly within an auditing context. The essay defines each heuristic and bias, providing real-world examples to illustrate their effects. It then explores how these cognitive shortcuts can influence decisions made during audits, such as in the planning and analysis phases. The essay also discusses factors that can mitigate the influence of these biases, such as reviewing all available information and making decisions based on facts rather than assumptions. Overall, the essay aims to provide a comprehensive understanding of how heuristics and biases can affect judgment and decision-making in business contexts, with a specific focus on the auditing field.

Running head: HEURISTICS AND BIAS 1
Heuristics and Bias
Name
Institution

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A heuristic is a mental shortcut that helps us make decisions and judgments quickly
without spending a lot of time researching and analyzing the information. On the other hand, a
bias is also known as cognitive bias are the errors that come as a result of the judgments and
decisions made. (Tversky & Kahneman, 1974)
The following are the types of heuristics and bias;
Anchoring and Adjustment Heuristic
This is when people make decisions based on the first piece of information that they
receive (anchor). Therefore in every decision, they make they will adjust it in such a way that it
fits the information they have received. For example, if one has a certain number of marbles in
his hand and they ask a person to guess the number. The person then asks to be given a rough
estimate and the one with the marbles says 5. The answer that they give will be close to five
because this is their anchor. (Toplak et al., 2017)
How it affects an audit
It affects an audit during the planning phase. During this process, the auditor is required
to acquire documents from previous audits. This way while going through the previous audits he
or she will make them his/her anchor. Thus whatever decisions or judgments they make on will
be based on this first information that they have received.
Factors that affect this heuristic
1. Reviewing all information. If a person considers all the facts and information
presented then this heuristic is affected.
2. Considering both the negative and the positive. The anchor information may be
negative therefore if a person needs to considers the positive also.

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The following case is an example of anchoring and adjustment heuristic. Two groups
were both given a description of a woman and told to write an essay. The first group was told
negative attributes of the woman while the second was given positive attributes. The essays
written by the first group all said negative things about the woman while those written by the
second group all said pleasant things. The basis of both essays was from the first information
they received.
Representative Heuristic
This is a mental shortcut that helps us in making decisions based on our mental
prototypes. In other words, we make decisions based on categories or stereotypes. For example,
if we want to determine if a person is a criminal we will make this decision based on categories
or stereotypes. We believe that most men are criminals rather than women. Hence if the person is
male we are most likely to make an assumption that they are a criminal. This is because this fits
our mental prototype.
How it affects an audit
This can affect the audit when giving a preliminary review. In this stage, an auditor
evaluates the way a company operates and the internal processes. The auditor may already have
an assumption of how the company operates and this is a mental prototype.
Factors that affect this heuristic
1. Eliminating stereotypes.
2. Making decisions based on facts and not assumptions.
The following is an example of representative heuristic. A student is told to do a research
on the doctors in the medical industry. The student conducted interviews and most of the

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interviews were male. The student chose only male students and this is based on the stereotype
that most males are doctors.
Availability Heuristic
This is a mental shortcut that helps us in making a decision based on the ease of bringing
it to mind. People will tend to make decisions based on what they easily know or examples they
can give easily. For example when people are asked what the percentage of crime is in 2018;
most people are most likely to give a high percentage. This is because of all the crimes being
highlighted in the news from rape to robbery and theft. (Pogarsky et al., 2017)
How it affects an audit
When writing the conclusion in an audit report, one will draw conclusions that come
easily to mind rather than the facts of findings. When giving examples of the financial records or
statements the auditor will give examples that come easily to mind.
Factors that affect this heuristic
1. Making decisions based on all the facts and not what one knows.
2. Conducting enough research to be aware of all the information.
The following is an example of availability heuristic. Students are asked to name drug
mostly abused in campuses. The student concludes that marijuana is the drug abused most.
However, statistics show that the drug abused most is pills. Therefore we see that the student
came to this conclusion based on what they easily know.
Selection Bias
This is when a person selects individuals, groups or data for analysis in a non-randomized
way hence the groups chose to end up not being representatives of the information being

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analyzed. For example, while conducting a research one collects sample that does not represent
the research thus leading to false statistics.
How it affects an audit
This affects an audit in the analysis stage. In this stage one is required to check financial
statements to determine if they contain data entry errors or any misstatements. When testing
random data to determine if there are any data errors one might pick data in a no-randomized
way, thus coming up with inconclusive results. They may find there were misstatements in the
financial record when in a real sense they were none.
Factors that affect this bias
1. Picking individuals, groups or data for analysis in a properly randomized way.
2. Using sample data that correctly represents the information being analyzed.
The following is an example of selective bias. A student was told to write a report on how
mothers feel when lactating. The student chose mothers to interview in order to draw a
conclusion on the report. They chose the mothers in a non-randomized way thus ending up with
mothers that did not lactate hence the findings were inconclusive
Loss Aversion
This is when people make decisions based on the losses they will incur rather than the
gains they will make. A good example is making a bet with a person about the turnout of a
football game. If team A losses then you lose $100 but if it wins you get amount $X. The study
shows that amount $X has to be twice that of the amount lost in order to compensate for the loss.
How it affects an audit

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When looking at financial statements so as to make an audit, the auditor may find
themselves focusing on the losses incurred by the company. Therefore their final audit report
will involve the ways on how to avoid this loss or how to minimize them as much as possible.
Factors affecting this bias
1. Focusing on the gains. If a person focuses on what is gained rather than the loss
incurred then they will not waste time trying to avoid losses.
2. It can also be affected by avoiding feeling pain due to losing but by looking at it as a
learning lesson.
The following is an example of loss aversion. A student is given 12 boxes of cookies to
sell. During the selling period, 4 boxes of cookies expire and the student manages to only sell
six. The student becomes really disappointed due to the loss incurred by the expired cookies. In
their final report, they focus on the loss incurred rather than the accomplishment.

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References
Pogarsky, G., Roche, S. P., & Pickett, J. T. (2017). Heuristics and biases, rational choice, and
sanction perceptions. Criminology, 55(1), 85-111.
Toplak, M. E., West, R. F., & Stanovich, K. E. (2017). Real‐World Correlates of Performance on
Heuristics and Biases Tasks in a Community Sample. Journal of Behavioral Decision
Making, 30(2), 541-554