Much of the accounting literature available today focus on decision-making that is quantifiable in measuring financial outcomes. By contrast, little consideration is given to the behavioral dimensions that often affect decision-making within financial and managerial accounting processes.
Budgeting and Biases
Budgeting requires forecasting of cost and sales for the year ahead. Most organizations are profit-driven. So, when considering three different budget projections, low, medium and high profit returns in three different budget forecasts, the scenario that creates the greatest profits will likely become the favoured budget projection. This could be construed as a budgeting bias.
Decision Making and Budgeting
It is reasonable to consider that not all benefits derived during a business cycle can be quantifiable on a balance sheet. Reputation management and brand awareness can be difficult to assign valuations to. Hence, budget approval biases lean towards approving the budget with the great financial profit scenario and not those that favour intangible asset creation.
Heuristics and Decision-Making
Adding to the complexity of making budgeting decisions based on real data, research into experimental psychology and accounting shows that when decision makers (such as business owners and board of directors) emotionally assess budget forecasts and probabilities they often rely on unreliable and unintended behavioural factors rather than on the laws of probability.
Solutions to Complex Problems
So, given that heuristics are really nothing more than mental processes that most people use to quickly make decisions, it is understandable that those tasked with approving budgets will focus on the most attractive of all budget scenarios, and lean towards approving the budget that shows the greatest financial return in the year ahead.
Elaine Allan, BA, MBA
Technology & Business Blogger