The Effects of Hindsight Bias on Jurors' Evaluations of Auditor Decisions*

doi:10.1111/j.1540-5915.1994.tb00811.x

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Wiley InterScience

Decision Sciences

Volume 25 Issue 3, Pages 401 - 426

Published Online: 7 Jun 2007

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The Effects of Hindsight Bias on Jurors' Evaluations of Auditor Decisions*

D. Jordan Lowe ¹ ^, ³ Philip M.J. Reckers ² ^, ⁴

¹ Department of Accounting, Virginia Polytechnic Institute and State University, Blacksburg, VA 24061-0101 ² Department of Accounting, Arizona State University, Tempe, AZ 85287-3606

*We are thankful for the valuable comments of Baruch Fischhoff, Marianne Jennings, Steve Kaplan, Kurt Pany, two anonymous reviewers, and an associate editor on earlier versions of our paper. We also appreciate comments received from presentations made at Louisiana State University, Syracuse University, the University of Texas at San Antonio, and Virginia Polytechnic Institute and State University. Financial support from the Ernst and Young Foundation is gratefully acknowledged.

³ D. Jordan Lowe is Assistant Professor of Accounting at Virginia Polytechnic Institute and State University. He received his B.S. and MAcc. degrees from Brigham Young University and his Ph.D. from Arizona State University. His research interests include behavioral decision making, expertise, and legal liability. Dr. Lowe has published articles in such journals as Auditing: A Journal of Practice and Theory, Journal of Economic Psychology, and Journal of Business and Psychology.

⁴ Philip M.J. Reckers is Professor of Accountancy at Arizona State University. He received his B.S. from Quincy College, his M.B.A. from Washington University, and his Ph.D. from the University of Illinois. Dr. Recker's research interests focus on behavioral dimensions of professional decision making. He has published extensively in a variety of journals including articles in The Accounting Review, Journal of Accounting Research, Accounting, Organization and Society, Journal of Economic Psychology, and Contemporary Accounting Research. He is an associate editor of Advances in Accounting and serves on the editorial board of Auditing: A Journal of Practice and Theory.

KEYWORDS

Auditing • Decision Processes • Legal Issues

ABSTRACT

Abstract

Hindsight bias refers to the tendency of individuals with outcome knowledge (hindsight) to alter their perception of an event such that, ex-post, one's assumed ability to predict an event is greater than one's ex-ante ability. Auditors must make decisions without knowledge of an eventual outcome, but auditor liability is determined from a perspective that includes outcome knowledge. A behavioral experiment was conducted with 92 prospective jurors. Jurors were presented with a case in which auditors performed an audit of a client company and subsequently issued the standard, favorable audit report. Outcome knowledge was manipulated as: (1) no outcome (control group), (2) negative outcome (bankruptcy and subsequent lawsuit), and (3) negative outcome with a debiasing strategy. Results indicate that outcome knowledge biased jurors' evaluations of the auditor's judgment. Additional analysis revealed that the results are consistent with a cognitive interpretation of hindsight bias. The debiasing strategy was found to be effective in mitigating hindsight bias.

Received: May 3, 1993. Accepted:May 23, 1994.

DIGITAL OBJECT IDENTIFIER (DOI)

10.1111/j.1540-5915.1994.tb01850.x About DOI