Page 161 - COSO Guidance

Enhancing Board Oversight: Avoiding Judgment Traps and Biases | 13

Potential anchors are abundant in business settings. Initial The availability tendency often affects performance
values or starting points may be suggested from historical evaluations in business settings. For example, if highly
precedent; past experience; industry data; or, surprisingly, salient negative feedback about a subordinate’s
seemingly irrelevant information. performance is received by the evaluator close to when
the evaluation is made, the evaluator’s assessment of the
Think back to the earlier example of a contingent liability subordinate’s performance may very well be unknowingly
estimate. Estimates of potential risk likelihoods and and inappropriately skewed by that feedback, even if the
magnitudes are prone to the anchoring tendency. Suppose colleague’s performance during the period was overall
one of the board members believes that management’s very positive. Of course, in a similar fashion, positive
estimate for the contingent liability is too low. Even if the feedback or a success close to when the evaluation is
board member is successful in convincing the rest of the being made can lead to an overly positive assessment.
board that the amount should be increased, the board will
tend to anchor on the initial estimate and adjust it by an A particular situation in which the availability tendency
insufficient amount. Preliminary numbers serve as anchors, might impact boards is when directors serve on multiple
and they can powerfully, yet unknowingly, affect a decision boards. In these cases, the conclusions reached or
maker’s judgments. outcomes obtained recently from business judgments
for another company would be very available and may
You can imagine how pervasive anchoring effects are in suboptimally influence a director’s recommendation or
negotiations of various kinds when a low or high starting judgment pertaining to the current company. For instance,
figure is thrown out. This tendency is powerful and if a board member has recently observed a positive
pervasive. You can bet that expert negotiators regularly (negative) acquisition outcome at another company, it may
use this tendency to their own advantage. Those who are cause the director to unknowingly increase (decrease) the
unaware of it are not only very likely subject to bias but estimated likelihood of the success of the proposed ABC
also vulnerable to possible manipulation by others. Manufacturing Inc. acquisition.
In the ABC Manufacturing Inc. acquisition example, the Common board responsibilities that could be affected by
suggested purchase price of $800 million serves as an the availability tendency include the following:
anchor. This is not to say that all initial values are incorrect,
only that the initial values that are determined to be • Evaluating business strategy and the likelihood of
incorrect will have undue influence on revised estimates. threats to achieving goals
Other common areas where anchors could influence
board judgment include reviewing and approving financial • Assessing the quality of the entity’s executive team
budgets and forecasts, reviewing and approving executive and determining whether the company can achieve
compensation, and evaluating cost reduction or revenue- its objectives
enhancing proposals.
• Assessing synergies in business acquisitions
Availability Tendency
The availability tendency is the tendency for decision • Evaluating the impact of a proposed or new regulation
makers to consider information that is easily retrievable
from memory as being more likely, more relevant, and more
important for a judgment. In other words, the information
that is most available to our memory may unduly influence
estimates, probability assessments, and other professional
judgments. Like other mental shortcuts, the availability
tendency often serves us well, but it has been shown to
introduce bias into judgments in business settings.

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