Chapter 3, Problem 3.2E

Cognitive Bias. A team of accounting students is working on a case where they are required to assess a set of information to determine a company’s allowance for bad debts. The students have many pieces of information to analyze, including

The company’s allowance for bad debts has been 5% of its receivables for the last several years

This year, the company has strengthened its credit extension policy.

The average time that an accounts receivable has been outstanding has increased from 40 to 50 days this year.

The economy has weakened over the year, with a pending recession.

Following is part of the discussion at their first team meeting. Analyze the discussion and determine the type of cognitive bias most consistent with the statements made by each student, providing an explanation for your answer.

Discussion

Tom initiated the discussion saying, “I have seen this kind of situation before when a company has to report a higher allowance than last year. Allowances are always increasing.”

Jennifer offered. “The first piece of information in the case is always the most important.

The bad debts have historically been 5%. Therefore, the allowance has to be 5%.”

Jake added, “As I look at the case, I keep coming back to the fact that the average time that an account receivable has been outstanding has increased by 10 days. In my view, this is the most important piece of information—the other facts don’t matter.”

Manna’s view was, “Even though the economy has deteriorated, the historical data is always more important. The general trends in the economy are not relevant.”