Avoiding Decision Traps

Cognitive biases and mental shortcuts can lead managers into costly errors of judgment.

Self-Serving Bias

Unlike biases that can lead people to act against their interests, the self-serving bias motivates people to reach conclusions that favor them. For that reason, such “motivated” biases may be more powerful, says Max H. Bazerman, Straus Professor at Harvard Business School.

Narrowly defined, self-serving bias leads people to see data in the way they most want to see it, which may prompt them to take credit for successes and shun blame for failures. More broadly, this bias can refer to a person’s inclination to unintentionally select or distort facts to suit his preferences. It frequently rears its head in negotiations, says Bazerman, “where two honest people both believe they deserve 60 percent of the pie, and are not able to reach an agreement.” Self-serving bias can also wreak havoc on a group undertaking, where afflicted people may perceive that others are not doing their fair share of the work.

Auditors anxious to please clients are particularly vulnerable. In a 2002 experiment, Bazerman and three colleagues gave five ambiguous auditing vignettes to 139 auditors in a Big Four accounting firm and asked them to judge the accounting. Half the auditors were asked to pretend they were hired by the company being audited, and the other half that they were hired by a company doing business with the audited company. The result: the auditors working for the audited company were 30 percent more likely, on average, to find that the accounting complied with generally accepted accounting principles.

Like the other biases, says Bazerman, self-serving biases can be mitigated, but are too strong to eliminate completely. They thus require structural fixes such as formal checks and balances for project approval and monitoring.

For this reason, Bazerman believes the Sarbanes-Oxley Act of 2002 is destined to fail. Auditors, he points out, “still have a motivation to get rehired, to sell tax services, to potentially take jobs with the firms they audit.” Without truly independent auditors, investors will still be at the mercy of fallible human judgment.

Edward Teach is articles editor of CFO.

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