Gerard explains how accountants need to be aware of heuristics.

1. LO 3 Explain how heuristics are used
in unstructured decision-making
using accounting information
1 Created by Dr G. L. Ilott, CQUniversity Australia

2. 2 Created by Dr G. L. Ilott, CQUniversity Australia

3. Why consider unstructured decisions?
Not all investor decisions are arrived at using ordered, structured and
rational processes.
Sometimes, "quick and dirty" methods are used, and research
suggests that decisions made using these methods can be just as
effective as ordered and rational decisions.
3 Created by Dr G. L. Ilott, CQUniversity Australia

4. What are "heuristics"?
Heuristics are "rules of thumb" that offer a
short cut decision process.
Each person has his or her own heuristics,
but psychologists have found broad
groupings.
It is useful for accountants to be aware of
these, and how they might be used by
those who read and act on financial
reports.
4 Created by Dr G. L. Ilott, CQUniversity Australia

5. The three broad heuristics
The three broad heuristics are:
1. Representiveness
2. Anchoring and adjustment, and
3. Availability.
5 Created by Dr G. L. Ilott, CQUniversity Australia

6. Representiveness
Individuals assess the likelihood of an item belonging to a category due
to its similarity or representativeness of other items in known
categories.
For example, an investor might judge a company harshly if the
reported profits/losses are representative of previous bad numbers
(either from that company or from similar companies) that had “burnt”
the investor.
6 Created by Dr G. L. Ilott, CQUniversity Australia

7. Anchoring & adjustment
Investors will make an initial judgment based on some important
aspect, but are then prepared to make adjustments to that judgment
as more information is assessed.
In this scenario, an investor might judge a company harshly based on
reported losses, but then modify the judgment if historical data
reflects a likelihood of a return to strong performance in the future.
7 Created by Dr G. L. Ilott, CQUniversity Australia

8. Availability
Judgements will be made quicker if related occurrences or events can
be readily recalled.
In this scenario, an investor might judge a company harshly if there has
been a record of poor performance, or vice-versa.
8 Created by Dr G. L. Ilott, CQUniversity Australia

9. Conclusion
Heuristics are very un-scientific, but are widely used.
Accountants should be aware that sometimes people make
judgements based on their reports that are not what the accountant
expected.
A knowledge of heuristics provides guidance on how unstructured
decisions can be made.
9 Created by Dr G. L. Ilott, CQUniversity Australia