How to de-bias investment judgements–unpacking bias and possible remedies in a capital investment context

Abstract

Purpose

Research on biases in investment decision-making is indubitably important; however, studies in this context are relatively scarce. Unpacking bias has received attention in the psychological literature yet very little attention from management accounting research. This bias suggests that the perceived probability that an event will occur generally increases when the event's description is unpacked into a disjunction of subevents. The authors hypothesize that for a capital investment decision context, managers' judgement of the probability of a future event depends on whether the event is described as one packed event or is unpacked into several disjoint subevents. Additionally, the authors propose that altering the format of the description of an event's occurrence from percentage values to relative frequencies reduces unpacking bias.

Design/methodology/approach

To test the study’s hypotheses, the authors conducted two experiments based on a 3 × 2 mixed experimental design in which manager participants were asked to estimate the failure probabilities of technical systems in the context of an investment decision.

Findings

The authors provide evidence that unpacking bias occurs in an investment scenario, which can be characterized as a high-stakes decision context. Changing the format in which probabilities are presented from percentage values to relative frequencies significantly reduces the bias.

Research limitations/implications

Additional instructions did not further reduce unpacking bias.

Practical implications

For investment decisions under uncertainty, performance indicators in management templates should be presented in relative frequencies to improve managerial decision-making. The fact that the authors could not show an additional effect of instructions in management accounting reports indicates that it is challenging for management accountants to reduce the biased decision-making of managers by “teaching” them through the provision of instructions.

Originality/value

The authors contribute to accounting research by illustrating unpacking bias and by deriving a debiasing mechanism in a capital investment decision context.

Citation

Scherm, A., Hirsch, B., Sohn, M. and Maske, M. (2022), "How to de-bias investment judgements–unpacking bias and possible remedies in a capital investment context", Journal of Applied Accounting Research, Vol. 23 No. 5, pp. 1005-1023. https://doi.org/10.1108/JAAR-01-2021-0005