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Errors in Judgment and Strategies for Prevention
In 1972, psychologist Daniel Kahneman, who was awarded the Nobel Prize in Economics 30 years later, and his associate, Amos Tversky, coined the term "cognitive bias," which refers to the tendency of individuals to make systematic judgment errors when making decisions. These errors typically result from informationprocessing shortcuts or heuristic behaviors mat are "hardwired" or embedded into human decision-making processes.
Dozens of cognitive biases have been identified and catalogued by psychologists, including several that are often mentioned in everyday conversations. "Gambler's fallacy," for example, refers to the belief that the likelihood of a future event is impacted by random and unrelated past events. It is common to find a casino patron keeping a written record of the outcomes of a roulette wheel, ostensibly to use mat information when placing future bets; however, each spin of a properly balanced roulette wheel produces an outcome that is unrelated to that of past and future spins.
Exhibit 1 lists several other widely recognized cognitive biases that have a persistent - and typically adverse - impact on the quality of everyday decisions. Keen advertising specialists and political campaign directors rely on die "bandwagon effect" or "herd instinct" to trigger behavior among consumers and voters. Regulatory and law enforcement authorities are routinely exasperated by the "ostrich effect" that causes certain individuals to discount public health alerts, ignore hurricane evacuation warnings, and refuse to read the caveats and disclaimers affixed to food and other consumer products. In our judicial system, jurors might fall prey to the "guilt by association" fallacy and thereby ruin the life of an unlucky but law-abiding citizen who happened to be in the wrong place at the wrong time.
Cognitive biases can cause errors in judgment across practically every context in which humans make decisions, but especially so in complex and pressure-packed settings, such as when auditors conduct independent audits. Psychological studies have shown repeatedly that cognitive biases often influence auditors' decisions. There are isolated cases in which overt economic self-interests have allegedly influenced or biased auditors' judgments. An excessive desire to please a client does not qualify as a cognitive bias, however; it is, instead, often a symptom of impaired auditor independence.
The following discussion provides an overview...