C o m m i t t e e o f S p o n s o r i n g O r g a n i z a t i o n s o f t h e T r e a d w a y C o m m i s s i o n

E n h a n c i n g

B oa r d

O v e r s i g h t

Avoiding Judgment Traps and Biases

By
KPMG LLP | Steven M. Glover | Douglas F. Prawitt

The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to
specific situations should be determined through consultation with your professional adviser. In addition, the authors do not provide legal services,
and the user should consult with qualified legal counsel licensed to practice in the relevant jurisdictions. This thought paper represents the views of
the authors only and does not necessarily represent the views or professional advice of KPMG LLP, Brigham Young University, or COSO.
Authors
KPMG LLP
Contributing authors from KPMG LLP include: Consistently making high-quality professional judgments in a constantly
Sam Ranzilla changing environment has never been more important or challenging.
National Managing Partner, The growing complexities of the global business environment and
Audit Quality and Professional Practice
George Herrmann demands for effective corporate governance and oversight have placed a
National Office Partner premium on sound judgment and decision making by all key players in the
Rob Chevalier marketplace: management, boards of directors, auditors, and others.
National Office Partner
Our hope is that this collaboration—incorporating insights from academic
Steven M. Glover, CPA, Ph.D. research and reflecting KPMG’s commitment to consistent and incisive
Chaired Professor of Accounting, professional judgment in all aspects of its work—will be useful to board
Brigham Young University members in appropriately evaluating and challenging judgments and in
encouraging sound decision making and solid performance.
Douglas F. Prawitt, CPA, Ph.D.
Chaired Professor of Accounting, KPMG LLP | Steven M. Glover | Douglas F. Prawitt
Brigham Young University

COSO Board Members

David L. Landsittel Larry E. Rittenberg
COSO Chair COSO Chair—Emeritus

Mark S. Beasley Chuck E. Landes

American Accounting Association American Institute of CPAs (AICPA)

Douglas F. Prawitt Jeff C. Thomson

American Accounting Association Institute of Management Accountants

Richard F. Chambers Sandra Richtermeyer

The Institute of Internal Auditors Institute of Management Accountants

Marie N. Hollein
Financial Executives International

Preface
This project was commissioned by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO), which is dedicated to providing thought leadership through the development of comprehensive
frameworks and guidance on enterprise risk management, internal control, and fraud deterrence designed to
improve organizational performance and governance and to reduce the extent of fraud in organizations.
COSO is a private-sector initiative jointly sponsored and funded by the following organizations:

American Accounting Association (AAA)

American Institute of CPAs (AICPA)

Financial Executives International (FEI)

The Institute of Management Accountants (IMA)

Committee of Sponsoring Organizations
of the Treadway Commission

The Institute of Internal Auditors (IIA) www.co s o.o rg

 E n h a n c i n g

B oa r d

O v e r s i g h t

Avoiding Judgment Traps and Biases

Research Commissioned by

Co m m i t te e o f S p o n s o r i n g Organizations of the Treadway Commission

March 2012
Copyright © 2012, The Committee of Sponsoring Organizations of the Treadway Commission (COSO).
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All Rights Reserved. No part of this publication may be reproduced, redistributed, transmitted or displayed in any form or
by any means without written permission. For information regarding licensing and reprint permissions please contact the
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Direct all inquiries to copyright@aicpa.org or AICPA, Attn: Manager, Rights and Permissions, 220 Leigh Farm Rd.,
Durham, NC 27707. Telephone inquiries may be directed to 888-777-7707.

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 Enhancing Board Oversight: Avoiding Judgment Traps and Biases | iii

Content Outline Page

Introduction 1

A Model of Good Judgment 3

Our Intuitive Judgment Processes Can Betray Us 4

Common Judgment Traps 5

Boosting the Board’s Ability to Appropriately
Challenge Judgments Through Proactive Framing 7

Common Judgment Tendencies and Related Biases 9

Tendencies That Can Lead to Bias 10

Mitigating the Effects of Judgment Traps and Biases 15

Summary Observations 17

About COSO 20

About the Authors 20

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 Enhancing Board Oversight: Avoiding Judgment Traps and Biases | 1

Introduction
The board of directors plays a major role in setting strategy; The business judgment rule, which helps directors meet
formulating high-level objectives; allocating resources; the increasingly challenging role of strategic decision
and providing guidance, direction, and accountability for making without undue fear of liability, grants immunity
management. The Committee of Sponsoring Organizations to directors and officers for losses incurred in corporate
of the Treadway Commission’s (COSO’s) Internal Control— transactions within their authority, so long as the
Integrated Framework and Enterprise Risk Management— transactions are made in good faith with reasonable skill
Integrated Framework identify effective board oversight and prudence.1
as one of the fundamental principles for establishing the
entity’s tone at the top within the internal environment. In Although case law supports the business judgment rule,
this context, the board has responsibilities for providing directors are exposed to liability if they do not exercise
governance and oversight, including defining what it sound professional judgment. For example, in one case, the
expects in terms of integrity and ethics. court held directors liable when evidence was presented
that the directors reached a decision to sell a company
COSO’s recent thought paper, Effective Enterprise Risk at a particular price after hearing only a 20-minute oral
Oversight: The Role of the Board of Directors, notes that presentation concerning the sale. The court also noted that
[t]he role of the board of directors in enterprise-wide the directors had received no documentation indicating
risk oversight has become increasingly challenging as that the sale price was adequate and had not requested
expectations for board engagement are at all time highs a study to help them determine whether the price was
…. The complexity of business transactions, technology fair. The court determined that because they failed to
advances, globalization, speed of product cycles, and adequately inform themselves and had not engaged in a
the overall pace of change have increased the volume sound judgment process, the directors were liable to the
and complexities of risks facing organizations over the shareholders for negligence.2
last decade.
Boards of directors generally comprise highly capable
Recent research on fraudulent financial reporting issued by people who are well aware of the need for careful
COSO in 2010, Fraudulent Financial Reporting 1998–2007 judgment processes that can be justified and defended
—An Analysis of U.S. Public Companies, found that even and who know the potential impact that poor decisions
boards and audit committees that possess many of the can have on the success of the business, shareholder
characteristics deemed to be effective best practices for value, and director liability. Notwithstanding this fact,
board governance (a majority of independent directors, 100 opportunities for improvement in the judgment processes
percent independent audit committees, the presence of of directors are likely available. Corporate governance is
financial expertise on audit committees, frequent meetings, enhanced when directors improve their ability to exercise
and so on) are sometimes misled by management who have an appropriate level of skepticism and actively engage with
fraudulently distorted the organization’s financial statements. management. Entities and their key stakeholders are better
served when directors effectively challenge management’s
Directors are required to exhibit sound judgment in fulfilling judgments, explicitly consider alternative perspectives, and
their fiduciary responsibilities of corporate governance and engage management in frank and open discussions.
oversight, including overseeing the entity’s efforts to prevent
fraud and effectively manage enterprise risks. In meeting
their obligation, directors often face a variety of difficult
questions requiring judgment calls on matters such as the
acquisition of other businesses, sales of assets, and
business expansion. The need for high-quality judgment and
oversight has never been greater. Directors who consistently
make high-quality judgments distinguish themselves and the
entities they represent in the marketplace.

The rule originated in Otis & Co. v. Pennsylvania R. Co., 61 F. Supp. 905 (D.C. Pa. 1945).
1

2
Smith v. Van Gorkom, 488 A.2d 858 (Del. 1985).

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2 | Enhancing Board Oversight: Avoiding Judgment Traps and Biases

Ironically, despite the fact that we constantly make For purposes of this thought paper, judgment is the process
judgments and decisions and that the demand for good of reaching a decision or drawing a conclusion when there
judgment is high, most people receive very little formal are a number of possible alternative solutions.3 An effective
training in what good judgment looks like or in the human judgment process will be logical, flexible, unbiased,
tendencies that threaten good judgment. Although objective, and consistent. It will utilize an appropriate
talent and experience are clearly important components amount of relevant information, and it will properly
of effective professional judgment, researchers have balance experience, knowledge, intuition, and emotion.
discovered key insights in judgment and decision making However, we often do not follow a sound process due to
over the last few decades that have the potential to common judgment traps and tendencies that can lead to
enhance the professional judgment skills of even highly bias. Some of these tendencies are judgment shortcuts
experienced directors and officers. that help simplify a complex world and facilitate more
efficient judgments. However, these shortcuts sometimes
can lead to suboptimal judgments. The judgment traps
The purpose of this thought paper is to improve board and tendencies are systematic—in other words, they are
oversight of management’s judgments by raising common to most people, and they are predictable.
board member awareness of important insights that
can improve the judgment of experienced business By consistently following a sound judgment process,
executives and board members. understanding where directors and management are
vulnerable to predictable traps, and appropriately
challenging their own judgments and the judgments of
For example, research has found that judgments can be those they are charged with overseeing, directors can
flawed when decision makers do not consistently follow improve their oversight and monitoring of the organization’s
a sound judgment process and when they fall prey to strategies and risks, including the risk of fraud. Following
systematic, predictable traps and biases that can lower a better judgment process translates to improved risk
the quality of judgments. Making judgments in groups management and better business outcomes. This thought
can exacerbate these traps and biases and can present paper highlights some of the common pitfalls and biases
additional judgment pitfalls if group interactions are not in judgments to which decision makers are vulnerable and
structured and conducted properly. provides an overview of actions and steps that boards can
take to avoid falling prey to them.
The challenge for board members is both to effectively
challenge the judgments of corporate officers and enhance
the quality of their own judgments. These two aspects
of professional judgment are essential to organizational
performance and the effective oversight of enterprise-wide risk.

3
Many judgments are typically made in coming to a decision. For simplicity, in this paper we refer to the
combined processes of judgment and decision making as judgment.

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 Enhancing Board Oversight: Avoiding Judgment Traps and Biases | 3

A Model of Good Judgment

In order to exercise sound judgment, it is helpful to consistently
follow a good judgment process. With an understanding of KPMG’s Professional Judgment Framework
the components of a good judgment process, as well as the
common threats to good judgment, the quality, justifiability, The five-step process illustrated in exhibit 1 is adapted
and defensibility of judgments can be improved. from KPMG LLP’s Professional Judgment Framework.

The following exhibit 1 illustrates a model of a good judgment This five-step process is simple and intuitive, but when
properly employed, it can guide judgments and help
process. The steps in this process are simple to understand,
identify where and when our judgments are threatened
and they will not surprise you; however, it is important to by predictable, systematic judgment traps and biases.
remember that, although the steps are a representation of
the process that we should follow, the exhibit does not depict
how people often actually make judgments. Thus, this simple
representation of a good judgment process provides a helpful
context to illustrate where judgments can go wrong. The
reality is that in a world of high-stake decisions, deadlines,
and limited capacity, the judgments of even highly educated,
capable people are vulnerable to common, systematic traps
and predictable biases.

Exhibit 1: Professional Judgment Process

Defining the problem and identifying fundamental objectives Gathering and evaluating appropriate amounts and types
(step 1) is crucial in setting the stage for high-quality of information, as indicated in step 3, is a critical step in
judgments. Skipping this step can result in time wasted coming to an informed conclusion, which is step 4. Finally,
solving the wrong problem, and it can severely limit the set step 5 involves articulating and documenting the rationale
of alternatives available for consideration. It is important for the conclusion, which provides the decision maker(s)
to consider alternatives (step 2) because our judgment an important opportunity to reflect on the rationale for a
can only be as good as the best alternative considered. judgment and on whether a sound professional judgment
As we discuss subsequently, decision makers often skip process was followed. The inability to adequately articulate
step 1 and consider an artificially constrained set of the rationale for a conclusion often will reveal that a
alternatives because they are influenced by a judgment decision may have been based on insufficient information or
trigger, which masquerades as a valid problem definition. may not have resulted from a good judgment process.

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4 | Enhancing Board Oversight: Avoiding Judgment Traps and Biases

Our Intuitive Judgment Processes Can Betray Us

Although this five-step judgment process is simple and We will refer to the following example as we describe in the
intuitive, it is important to realize that the judgment rest of this paper how directors can proactively frame and
tendencies and shortcuts that human beings often rely reframe issues to more effectively evaluate and challenge
on can short-circuit such a process, and as a result, our judgments and how they can identify and mitigate the
decisions can be biased. It is an interesting paradox that effects of common, systematic human tendencies that can
the human mind is capable of solving complex problems result in predictably biased judgment:
and developing new and creative solutions and, yet, can
be subject to predictable judgment traps and biases. The CEO and CFO of ABC Manufacturing Inc. call an
Consider the act of driving a car through traffic, which urgent meeting of the full board over a weekend. The issue
people regularly perform with relative ease. In terms of at hand is a business opportunity to acquire 100 percent
the judgments that are required, this is a very complex of the common equity of a supplier of raw materials used
task—so complex that even the most powerful computers in the company’s manufacturing process. The CEO starts
cannot perform it as well as humans. And yet, history off the meeting, “First off, I want to thank you for taking
is replete with examples of the devastating results of time out of your weekend to meet. We have an incredible
flawed judgment. To efficiently navigate complexity, we opportunity to vertically integrate our operations, ensure
often unknowingly use mental shortcuts and simplifying uninterrupted supply of critical raw materials, reduce
strategies. On balance, these simplifying shortcuts production time, and increase market share through this
and tendencies serve us well. However, because they acquisition. We assembled you on such short notice
are shortcuts, situations can arise in which they can because I want to be in a position to present our offer
systematically and predictably lead to suboptimal early next week.” The meeting is then handed off to the
judgments. Suboptimal judgments on trivial tasks are of CFO who says, “In front of you is a package of schedules
little consequence, but on critical high-stakes judgments, and analyses that we used in arriving at the offer price
they can be devastating. we are suggesting. The analyses are detailed and
comprehensive.” The CFO then walks the board members
As a simple illustration of how mental processes that through the calculations at a high level and shares a list
normally serve us very well can sometimes lead to bias, of factors that management considered in arriving at the
consider how our eyes can fool us when we see an optical offer price. “In conclusion,” says the CFO, “I believe you
illusion. Our eyes and related perceptual skills ordinarily will find that our figures align very well with what we know
are quite good at perceiving and helping us accurately of the raw material supplier and are fairly conservative in
judge shapes and motion. Just as with optical illusions, nature given the tremendous opportunity for synergistic
there are instances when the intuitive judgment of even cost savings, as well as gain in market share. Based on
the smartest and most experienced people falls prey to our analysis, we are confident that our offer price of $800
systematic cognitive illusions, referred to as judgment million is on target. In our view, this acquisition should be
traps and biases. Unfortunately, when it comes to judgment a slam dunk.” The CEO and CFO have made their decision
traps and biases, experience is not always the best to move forward and feel a sense of urgency to extend
teacher. The good news is that once we are aware of these the offer quickly, and they ask the board to step up and
traps and biases, we can deploy logical steps to reduce demonstrate decisiveness and vision by approving the
their impact and improve our judgment skills. extension of an offer.

“A hasty judgment is a first step to recantation.”

– Publilius Syrus (Roman writer)

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 Enhancing Board Oversight: Avoiding Judgment Traps and Biases | 5

Common Judgment Traps

One of the most common judgment traps that individuals and consensus. A key take-away is that groups need to beware
groups fall into is the tendency to want to immediately solve of early consensus for important judgments; it is often a
a problem, to appear decisive by making a quick judgment. sign of a surprisingly common judgment trap. Instead, group
In a group setting, this rush to solve is often manifested interactions should be designed and conducted to stimulate
as a tendency to strive toward quick compromise and and encourage the expression of different perspectives.
early consensus. Ineffective compromises are sometimes The board of directors is a key component of the control
reached in order to avoid conflict, rather than foster a environment, including setting the tone at the top (see
healthy consideration of opposing views. Groups tend to COSO’s Internal Control—Integrated Framework, 1992).
produce better judgments when diversity of thought is not As such, it is important for the board to function effectively
only tolerated but explicitly and specifically encouraged. and avoid groupthink and other group tendencies that can
Alfred Sloan, former chairman of the board of General present obstacles to sound judgment processes.
Motors, stated the following at the end of a meeting with the
company’s board of directors,4
I take it we are all in complete agreement on the decision
here…. Then I propose we postpone further discussion “An audit committee where everybody is happy and likes each
other is an audit committee that makes me nervous.”
of this matter until our next meeting to give ourselves
time to develop disagreement and perhaps gain some – Michael Schrage (MIT Sloan School of Management)
understanding of what the decision is all about.
Mr. Sloan saw the lack of conflicting views as a sign that
the group did not fully appreciate the underlying problem or
fundamental objectives. Most of the time, decision makers do not even realize when
they have fallen into the “rush to solve” trap. This tendency
is a trap because people fall into it unaware and, as a result,
One-third of audit committee members surveyed unknowingly develop a limited view of the problem that
indicate that they believe unhealthy groupthink they are addressing, the objectives that they are trying to
tendencies influence their meetings. achieve, and the available alternatives. In other words, if
we rush to get to a solution, we are likely to underinvest in
– KPMG Audit Committee Institute (2011 survey) the vital early steps of a good judgment process. People
falling into this trap often go with one of the first workable
alternatives offered or that come to mind. By underinvesting
Some seriously flawed judgments with calamitous in the first step of defining the problem and identifying
outcomes have been attributed to the set of group decision fundamental objectives, people sometimes solve the wrong
behaviors known as groupthink, including the ill-fated problem or settle for a suboptimal outcome. It is important
decision to launch the Challenger space shuttle in cold to remember that a judgment can only be as good as the
conditions in 1986. Members of a group who are subject best alternative considered. You will notice in the ABC
to groupthink behaviors tend to suppress their own views Manufacturing Inc. acquisition example that the tendency
for various reasons (for example, they may assume that to rush to solve can be exacerbated by external or self-
consensus in the group signals good judgment). This imposed deadlines.
behavior may be especially true in cases when a board
has a prominent member who expresses his or her views We often fall into the trap of inheriting or accepting an
early. Such a scenario can enhance the group’s tendency incomplete problem definition and can then fall into the
toward narrow thinking, suppression of divergent views, common trap of doing an absolutely excellent job of solving
and partially considered judgments. Interestingly, overly the wrong problem. An example of initially working on an
cohesive groups begin to believe that they have reached a incomplete problem definition would be a snack company
fail-safe conclusion when consensus is achieved; in other trying to take market share from the market leader. The
words, quick agreement among like-thinking members of market leader sells snacks in interesting, retro-shaped
a group can lead to extreme overconfidence among the packages. The company seeking to gain market share
group members. Fostering healthy debate and avoiding considers the shape to be the key competitive advantage;
early consensus is key to avoiding unhealthy tendencies thus, its early attempts to take market share are focused
toward suppression of views or early, potentially premature almost exclusively on developing a more eye-catching

See Drucker, 1967.

4

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6 | Enhancing Board Oversight: Avoiding Judgment Traps and Biases

package. When increases in market share do not follow, implemented much faster than would have been possible
the company adopts another perspective: simple and with a product developed from scratch, and it was far more
convenient package shapes keep costs down and make cost effective in both the short and long run.
it more convenient for consumers to purchase and store
more product. Just as in this simple example, companies As illustrated, judgment triggers often come in the form
that effectively consider multiple perspectives when faced of an alternative that is improperly used as a problem
with important judgments are able to develop a more definition. Given the tendency to rush to solutions, it is easy
complete problem definition and devise more effective to see how one might readily react to a trigger and move
strategies. We discuss the role of multiple perspectives, or forward without a complete list of fundamental objectives
judgment frames, later in this paper. or a clear definition of the problem. Obviously, adopting
a triggered alternative can work well if the alternative
What Is a Judgment Trigger? happens to be a workable or good alternative; if not, such
In the snack company example, the retro-shaped package an approach can lead to costly mistakes.
functioned as a form of judgment trigger, an assumed or
inherited problem definition that can lead the decision As another example of asking what and why questions to
maker to skip the crucial early steps in a good judgment drive to the fundamental problem and objectives, consider
process.5 A judgment trigger is another common judgment a common definition used for a retirement goal: “I need
trap and can often be recognized when a problem to have a certain amount of money saved in a retirement
definition is stated in the form of an alternative. In the ABC fund by the time I reach retirement age.” This certainly is a
Manufacturing Inc. acquisition example, the potential worthy goal, but as with many initial goals and objectives,
judgment trigger was the acquisition alternative presented. it is really only a means to an end. Following up by asking
Although ABC Manufacturing Inc.’s management may be why you want a certain amount of money for retirement,
right that the acquisition is a slam dunk opportunity, without as obvious as it might sound at first, can help uncover a
a clear definition of the underlying problem and objective more fundamental objective, which might be something
and a fuller consideration of the possible alternatives that like, “To maintain a high quality of life in retirement.” Note
ABC Manufacturing Inc. might pursue, management and the that pausing to search for fundamental objectives in this
board may be solving the wrong problem or settling for a example readily yields a number of additional alternative
suboptimal use of the company’s resources. approaches to achieving the objective of a high quality
of life, such as maintaining good health, identifying a
Asking What and Why Questions desirable retirement location, being free of debt, and so on.
Once we become aware of the potential dangers of Carefully defining the problem and identifying fundamental
judgment triggers, we can identify logical steps to better objectives by asking what and why questions is a key step
navigate through the judgment, such as asking what and in improving the quality of important judgments.
why questions. For example, after learning about judgment
triggers, an executive recognized a judgment trigger when
he was charged with overseeing the in-house development “A prudent question is one-half of wisdom.”
of customized software to track important projects at
the company. He noticed that the suggested problem – Francis Bacon (English scientist and statesman)
definition, the need for custom-developed software, was
actually just one potential alternative that was being
substituted in place of a well-defined fundamental problem
and specific objectives. Through the appropriate use of
what and why questions, he gained a better understanding
of the actual problem and related objectives and was
able to identify additional alternatives. In the end, he
found that an off-the-shelf, third-party product with some
ability to customize the software interface was a far more
cost-effective alternative. The third-party product was

5
See Smart Choices: A Practical Guide to Making Better Decisions, where the authors suggest that every judgment problem
has a trigger or initiating force.

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 Enhancing Board Oversight: Avoiding Judgment Traps and Biases | 7

Boosting the Board’s Ability to Appropriately

Challenge Judgments Through Proactive Framing
At the core of a director’s ability to raise effective questions, by policy makers from “the war on drugs” to “drugs are a
appropriately challenge and evaluate judgments, and cancer on our nation.” There are important implications
help both the board and management avoid judgment of thinking about the drug problem through one frame
traps and biases is a concept called judgment framing. versus the other. If the drug problem is a war, we will send
Frames are mental structures or perspectives that we use soldiers to the border; we will use force to attack and
to determine the relevance or importance of information. arrest. If it is a sickness, we will tend to educate the public,
The underlying analogy behind framing is that different treat addicts, and look for preventative measures. Again,
perspectives are visible through different window frames. the point is not that one frame is necessarily better than
For example, consider the different vistas that are available the other but, rather, that the two metaphors point to very
from different windows of the same office building. Different different perspectives and actions.
vistas or frames also are possible with judgment problems;
often, there are many possible perspectives on the same Identifying Frames
situation. Different frames can lead to significantly different Management and boards facing an important judgment
understandings or interpretations of a situation, and these will initially adopt a frame, and board members should
different understandings and interpretations will affect work to identify and understand the frame that is being
behavior and decisions. used by management, other board members, and the board
overall. One way to recognize a frame is by identifying
For example, research shows that people’s willingness to the analogies or metaphors being used. People often
take on risk depends on how a situation is framed.6 Doctors use sports metaphors, such as “this investment is a slam
and patients tend to select riskier treatment options when dunk.” This basketball analogy was used in the previous
a medical condition is framed in terms of the odds of dying ABC Manufacturing Inc. acquisition example, and it
as compared with when the identical situation is framed suggests a near guaranteed basketball scoring opportunity,
in terms of the likelihood of surviving—same situation, suggesting that the acquisition is obviously going to be
different frames. Similarly, tax professionals may be more highly successful and beneficial to the company and its
accepting of management’s high-risk tax position when shareholders, with very little risk of things going wrong.
the underlying transaction is a done deal as compared Analogies can shape important discussions; we can often
with when the same transaction and position are not yet challenge the frame by looking at the situation using a
completed. Same transaction; however, the professionals different analogy or metaphor.
either agreed or didn’t agree with management’s position
depending on the frame with which they viewed the
transaction. The point here is not to suggest that one frame “If everyone is thinking alike, someone isn’t thinking.”
is better than another; there often is no single best frame.
However, judgments can be improved by considering the – General George S. Patton
problem from the vantage point of multiple frames.

The Power of Framing

Frames are necessary and helpful, but individuals are often
unaware of the perspective or frame that they or others are
using. As a quick illustration of the power of framing, you
may have heard of the phrase “the war on drugs.” In an
effort to change the nation’s approach to the drug problem,
when General Barry McCaffrey became the nation’s “Drug
Czar” a number of years ago, one of the first things he did
was change the metaphor, or frame, that was being used

For a review of judgment framing and references to the underlying research, see Judgment in Managerial Decision Making.
6

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8 | Enhancing Board Oversight: Avoiding Judgment Traps and Biases

A distinguishing characteristic of those who consistently Management and boards might be able to identify such
make high-quality judgments is that they are frame-aware. views from down-the-line employees or outside sources.
They understand the judgment frame that they or others are
using, and they are able to consider the situation through Although not intended as a comprehensive list, other areas
different frames, or what KPMG LLP professionals refer where a heightened ability by the board to appropriately
to as a fresh lens. Referring back to the simple medical challenge judgments may prove particularly beneficial
treatment example, the best way to approach such a include the following:
decision would be to think about the odds from both the
survival and mortality perspectives and explicitly consider • Evaluating management’s business strategies and
how our judgment is affected by the different frames. On whether management is taking necessary steps to
a financial reporting issue, alternative frames that board achieve strategic goals
members might consider are perspectives of regulators,
analysts, investors, or a hindsight perspective, such as how • Evaluating risks, including the risks of fraud, and
will management’s judgment look if it is reported in the press assessing management’s internal control and other
in six months? responses to those risks

In the ABC Manufacturing Inc. acquisition example, there • Reviewing and approving financial budgets and forecasts
are a number of different frames to consider, such as
what would change if we considered this acquisition as • Evaluating the transparency of reported financial
a 3-point shot instead of a slam dunk, what is the problem information
that the acquisition is attempting to solve, and what are
the fundamental objectives. Additional frames might • Reviewing the adoption of new technology
be identified by asking whether alternative acquisition
opportunities may be better, whether it would be better to • Evaluating management’s plans to address the risks of
acquire less than 100 percent of the supplier, and whether various potential disasters
long-term raw material rights contracts might accomplish
similar benefits. One might also ask what could go wrong
or what the best arguments are for not going ahead with
the acquisition.

Seeking Alternative Views

Boards need to understand management’s frame, but
they also need to proactively consider issues through
alternative frames, which sometimes means that they need
to ask more questions or purposefully think through a view
that might go contrary to management’s perspective. For
example, although it is generally true that without taking
risk there is no reward, sometimes, executives adopt the
frame that risk equates directly to positive opportunity.
It may be prudent for the board to remind management
that not all risks are worth taking from other stakeholders’
perspectives and that with risk can come significant or
even catastrophic loss. Boards would also often be well
advised to take time to explicitly identify and carefully
consider the implications of alternative or opposing views.

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 Enhancing Board Oversight: Avoiding Judgment Traps and Biases | 9

Common Judgment Tendencies and Related Biases

Boards of directors are regularly charged with making shortcuts that are efficient and generally effective, but
challenging judgments in an environment characterized because they are shortcuts, they can lead to biased
by significant complexities, uncertainties, and pressures. judgments. These shortcuts are techniques that we all
In such an environment, where both efficiency and use, often unknowingly, to help cope with the complex
effectiveness are at a premium, it is important to environments in which we operate. As a quick example
understand where people are most likely to become of a simplifying judgment shortcut, when crossing a
vulnerable to systematic, predictable judgment traps and city street, say in New York City, some people don’t wait
biases. So far, we have discussed some common traps until they get a walk sign; instead, they move through
that can derail a judgment process, especially in group intersections by quickly looking to the left for oncoming
settings, and the importance of proactively identifying and traffic. If the coast is clear, they will take a step out into the
considering alternate frames. street and then look to the right for traffic coming the other
way. This is a very efficient and, often, effective shortcut
A formal judgment process like that depicted in exhibit 1 strategy. Over time, it becomes an unconscious, automatic
provides steps to good judgment when making important part of how some people cross the street in a busy U.S.
judgments. When making these kinds of judgments in a city. However, if they were to use this shortcut strategy in
complex world, however, individuals often unconsciously London or other cities where cars are driven on the other
fall prey to motivational biases and sometimes use side of the street, the consequences could be fatal.

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10 | Enhancing Board Oversight: Avoiding Judgment Traps and Biases

Tendencies That Can Lead to Bias

Understanding where we tend to take judgment shortcuts
and where our motives can subconsciously affect us “ It ain’t what you don’t know that gets you into trouble. It’s
can help us identify when the quality of our judgments what you know for sure that just ain’t so.”
can be affected by systematic bias. Fortunately, once we
understand the implications of our judgment tendencies, – Mark Twain
we can devise ways to mitigate potential resulting
bias. When it comes to crossing streets in London,
transportation officials have placed signs on the sidewalk, So, what’s wrong with overconfidence? Some may argue
on signposts, and even on streets to remind visiting that being extremely confident is a blessing, even a
pedestrians of the direction of traffic flow. The signs are necessary attribute of successful business professionals.
an attempt to get visitors out of the subconscious shortcut Although it is true that confidence is an important attribute,
mode and apply more formal thinking. overconfidence can lead to suboptimal judgments
because it can result in taking on too many projects,
Once we are aware of the judgment tendencies to which missed deadlines, budget overruns, shutting down
we are often unknowingly prone, we can identify intuitive, potentially useful discussions, reaching ill-considered snap
common sense methods to mitigate bias and improve judgments, considering too few alternatives, truncating
our judgment. Although research has identified many or skipping an information search, or solving the wrong
judgment tendencies and associated biases, we focus our problem. In the context of enterprise risk management
discussion in this paper on four common, bias-inducing (ERM), it can result in underestimating the likelihood or
tendencies that can predictably lead even the brightest potential magnitude of risks, ignoring certain stakeholder
people to make suboptimal judgments: overconfidence, perspectives, or neglecting to plan for the possibility
confirmation, anchoring, and availability.7 of events with potentially adverse outcomes. In terms
of assessing the possibility of fraud in the organization,
Overconfidence Tendency overconfidence can lead to an insufficient level of
Overconfidence is the tendency for decision makers to skepticism and questioning. In sum, overconfidence can
overestimate their own abilities to perform tasks or to result in avoiding, or poorly executing, a sound judgment
make accurate assessments of risks or other judgments process in any context. A recent study titled “Executive
and decisions. This prevalent subconscious tendency Overconfidence and the Slippery Slope to Financial
results from personal motivation or self-interest. The Misreporting” concluded that overconfidence on the
tendency to be more confident than is justified is likely part of business executives can lead to an optimistic bias
to affect individuals even when they are doing their best in financial reporting and, in turn, “leads them down a
to be objective. Research indicates that many people, slippery slope of … intentional misstatements.”9
including very experienced professionals, are consistently
overconfident when estimating outcomes or likelihoods. For In the ABC Manufacturing Inc. acquisition example, the
example, in one study, when doctors were asked to assess CEO and CFO express strong confidence in their analyses
the likelihood of pneumonia, they were highly confident and decision, and it very well may be the case that they
that their diagnoses would be wrong only 20 percent of are overconfident. Once board members are aware that
the time. Instead, they were wrong more than 80 percent overconfidence is a trait commonly found in business
of the time.8 Particularly relevant to board members is that executives that can influence their ability to make accurate
confidence grows more rapidly with experience than does estimates and probability assessments, board members
competence. In other words, the most overconfident people can take logical steps to mitigate the negative effects of
are typically the most experienced. this tendency.

7
For a detailed review of the tendencies discussed in this paper and references to the underlying research,
see Judgment in Managerial Decision Making.
8
See Winning Decisions.
9
See “Executive Overconfidence and the Slippery Slope to Financial Misreporting” in the Journal of Accounting and
Economics.

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 Enhancing Board Oversight: Avoiding Judgment Traps and Biases | 11

Confirmation Tendency Let’s consider another example. Suppose there has been an
You may have heard the old saying, “My mind is made up; explosion at a manufacturing facility. The CFO has presented
don’t confuse me with the facts!” In other words, once to the board an estimate of the resulting contingent liability.
people have adopted an initial preference or opinion, The CFO explains that she has arrived at a fairly narrow
they tend to favor information that supports and agrees range for the estimated liability of $110–$120 million using
with their initial preference or opinion. This describes the 2 different estimation techniques. The board carefully
confirmation tendency, which is the tendency for decision considers the analyses, and it appears that the CFO has
makers to seek—and put more weight on—information done a thorough job. The board’s confidence is bolstered
that is consistent with their initial beliefs or preferences. by the fact that the CFO was able to arrive at essentially
the same number using 2 different estimation approaches,
Decision makers, including business executives, tend to and both appear to be carefully performed. The board
seek confirmatory evidence, rather than conducting an reviews the analysis before the meeting and even double
objective search that includes looking for information checks some of the CFO’s calculations and assumptions
that might be inconsistent with their initial views or and concludes that the amount looks reasonable to
preferences. After obtaining some confirmatory evidence, compensate for human suffering and property damage at
decision makers often are confident that they have neighboring companies.
adequate evidence to support their belief. The more
confirmatory evidence that they are able to accumulate, Suppose that 1 year later, the company’s legal team comes
the more confident they become. Seeking and considering back to management and the board proposing a $200 million
only confirmatory evidence is a judgment shortcut that settlement. General counsel explains that $130 million was
can result in biased judgment because, in many situations, needed to compensate families, workers, and others who
we cannot know something to be true unless we explicitly were killed or injured and to pay for property damage to the
consider how and why it may be false. facilities of neighboring companies whose manufacturing
facilities were damaged by the explosion. But another
The confirmation tendency may bias board judgments $70 million was needed to compensate the owners of the
made in reviewing key performance indicators neighboring facilities to recover damages from lost business
(KPIs). Board members may be prone to overrely on because the damage to their facilities resulted in loss of
management’s explanation for a significant difference business and breach of contract because they were not
between budgeted and actual KPIs. Given the power of able to manufacture and deliver goods on schedule. The
the confirmation tendency, board members’ questions CFO did not consider these losses in her original analyses,
may unknowingly tend toward information that is likely to and because the board focused on confirmatory information
confirm management’s explanations, which can lead to a supporting the CFO’s analysis, rather than specifically
failure to consider information that might suggest alternate seeking potentially disconfirming information, they likewise
explanations. For example, statements made by some of did not consider the possibility of other costs. Consideration
Enron’s board members suggest that they may have been of such factors may seem obvious with the benefit of
too accepting of information presented by management, hindsight, but the confirmation tendency can powerfully limit
which may have been at least partially attributable to one’s thinking about factors and information outside of what
the confirmation bias. Thus, the confirmation tendency, has been previously considered.
which includes the failure to seek out and consider
disconfirming information, may explain why highly intelligent,
conscientious boards of directors might not always “The greatest obstacle to discovery is not ignorance, it is the
effectively oversee risk management processes and even illusion of knowledge.”
why they might fail to recognize indicators that management
is perpetuating fraud. – Daniel Boorstin (U.S. historian)

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12 | Enhancing Board Oversight: Avoiding Judgment Traps and Biases

In general, as a result of the pervasive nature of the Although not a comprehensive list, other common areas
confirmation tendency, boards may have a tendency to where the confirmation tendency may affect board
rely on management’s assertions and unknowingly or judgment include the following:
unintentionally be biased toward considering and seeking
only confirmatory evidence. A sign that the board might • Evaluating key assumptions in strategic plans and
be falling prey to the confirmation tendency is if meetings financial forecasts
with the board and management tend to be overly
comfortable or agreeable. As critically important overseers • Assessing capital structure in light of strategic initiatives
of strategy, execution, and risk management, boards must
appropriately and rigorously question management’s • Assessing the potential impact of legislation or internal
assertions and conscientiously consider potentially investigations
opposing views and information.
• Evaluating fair value estimates

“ In all affairs, it’s a healthy thing now and then to hang a Anchoring Tendency
question mark on things you have long taken for granted.” Anchoring is the tendency to make assessments by
starting from an initial numerical value and then adjusting
– Bertrand Russell (Welsh philosopher and logician) insufficiently away from that initial value in forming a
final judgment. As an example of the anchoring tendency,
managers tend to make salary decisions by adjusting
In the ABC Manufacturing Inc. acquisition example, from the starting point of a job applicant’s previous
the confirmation tendency could lead the board to rely salary. A prospective employer might quickly realize the
solely or primarily on management’s analysis. It would unreasonableness of the anchor (for example, the job
also likely combine with the judgment traps of rush to applicant’s salary at her previous employer was $58,000,
solve and judgment trigger. Also, the more confirming which was prior to her earning an MBA) but propose
evidence presented by management, the more confident a starting salary irrationally close to the starting point,
the board might become that the acquisition is a good or anchor. In this example, the job applicant is likely to
move. However, in ABC Manufacturing Inc.’s case, more receive a lower salary offer if the prospective employer
confirming evidence does not necessarily validate the knows her salary before she earned her MBA. There
decision because there may be important disconfirming are two components of anchoring and adjustment: the
evidence that should be considered. Applying an tendency to anchor on an initial value and the tendency
appropriate level of skepticism through the appropriate to make adjustments away from that initial value that are
use of different judgment frames would allow the board smaller than what is actually justified by the situation.
and management to more properly and fully apply a good
judgment process.

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 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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14 | Enhancing Board Oversight: Avoiding Judgment Traps and Biases

Exhibit 2 summarizes the traps and tendencies that we’ve discussed.

Exhibit 2: Brief Description of the Common Threats to Good Judgment in

the Context of the KPMG Professional Judgment Framework

Rush to Solve
The tendency to want to immediately solve a problem by making a quick judgment results in underinvestment
in steps 1 and 2 in the judgment process (see exhibit 1). Often, the solution is to select the first seemingly
workable alternative without sufficient consideration of the problem to be solved and the objectives to be
achieved. As a result of the rush-to-solve trap, decision makers sometimes end up solving the wrong problem,
or they might settle for a suboptimal outcome.

Judgment Triggers
Every judgment or decision has an initiating force that triggers a decision and that trigger can lead the
decision maker to skip the early steps in the judgment process. Triggers often come in the form of
an alternative masquerading as a problem definition, and we thus move forward without a complete
understanding of the problem or objectives and without a complete consideration of other alternatives.

Overconfidence
The pervasive tendency to be overconfident can lead to suboptimal behavior in every step of a good
judgment process. Overconfidence can lead to underinvesting in defining the problem and identifying
fundamental objectives, the consideration of too few alternatives, or truncating or skipping an information
search, all of which can lead to a suboptimal conclusion.

Confirmation
The confirmation tendency and related potential judgment bias primarily affects steps 3 and 4 of the
judgment process. Our tendency is to seek and overweight confirming information in the information
gathering and evaluation steps and to favor conclusions that are consistent with our initial beliefs or preferences.

Anchoring
The anchoring tendency and related potential judgment bias primarily affects step 3 of the judgment
process. In gathering and evaluating information, it is human nature to anchor on an initial value and adjust
insufficiently away from that value in making our final assessments.

Availability
The availability tendency limits alternatives considered or information gathered to those alternatives or
information that readily come to mind. The availability tendency can have particular influence on steps 2 and 3
of the judgment process.

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 Enhancing Board Oversight: Avoiding Judgment Traps and Biases | 15

Mitigating the Effects of Judgment Traps and Biases

Once we are aware of the traps and biases, we can take of the company. In evaluating management’s estimates and
steps to mitigate their effects. Although it is likely that assumptions, board members should explicitly question
traps, tendencies, and related biases will never disappear whether disconfirming evidence might be available or
from people’s judgment processes, understanding their even consult with outside experts to understand different
nature can help us recognize situations in which our perspectives. Making the opposing case and seeking
judgments can be biased. This recognition, in turn, enables disconfirming evidence are techniques that are effective in
us to take logical, intuitive steps to avoid judgment traps mitigating the adverse effects of all the judgment tendencies
and mitigate the effects of judgment biases. that we’ve discussed, as are the consideration of different
frames and the application of a sound judgment process.
The first step in mitigating traps and biases is to be
aware of possible sources and to recognize situations With respect to mitigating the bias associated with
where we might be vulnerable. Awareness, coupled anchoring, board members can purposefully introduce
with the consistent application of terminology to alternative anchors. Or, armed with the knowledge that
identify and label the potential traps and biases, is management will provide an estimate that might act as
key to improving judgment. Earlier, we mentioned how an anchor, the board could seek an evaluation from an
optical illusions cause our visual processes to mislead independent source who is not aware of management’s
us. Once we are made aware of the misperception, we estimate and will not be influenced by an anchor. When
can introduce logical tools to help process the visual we believe that recent or available information may be
information correctly or at least take steps to mitigate the biasing judgment, in addition to the common mitigation
misperception, given an awareness and understanding of techniques, we might obtain objective data over a longer
how our perceptions are likely affected. period of time.

Some of the most dangerous judgment traps—rush to solve Question Expert Opinions
and judgment triggers—have to do with the failure to follow To mitigate the effects of the overconfidence tendency,
the steps in a sound judgment process. In other words, board members can take the time to think through
one might pass too quickly through the initial steps in the and explicitly question experts’ or advisers’ estimates
judgment process in order to arrive quickly at a solution and underlying assumptions, even if, at first, they are
or conclusion. Recognizing that human beings have this inclined to agree with them. In addition, stress testing key
tendency, as previously discussed, a helpful mitigation assumptions can be a useful approach in understanding
strategy is to pause and ask what and why questions. Taking how susceptible estimates are to changes in individual or
time to ask questions and consider the steps of a good a combination of expectations. For example, in the ABC
judgment process can help us avoid these traps. Manufacturing Inc. acquisition example, in addition to
the questions previously noted under judgment framing,
the board could specifically ask management to identify
“ It is better to debate a question without settling it than to factors that could materially affect realization of the
settle a question without debating it.” benefits expected from the acquisition, such as an
unexpected downturn in the industry or general economy,
– Joseph Joubert (French essayist) or the introduction of technological innovation affecting
the cost or quality of upstream inputs. In addition to
understanding management’s analysis, the board could
Seek Opposing and Disconfirming Evidence specifically ask management to identify factors that have
If we believe that the confirmation tendency may be caused delays in the integration plans of other companies
influencing a judgment process, helpful mitigation in similar situations and consider how delays would affect
techniques include making the opposing case and seeking the estimated cost. Often, when potential causes of delays
disconfirming or conflicting evidence. For example, and related likelihoods are explicitly considered, decision
suppose management of a distressed company presents makers’ confidence in their initial assessment is tempered.
plans to the board for addressing a liquidity concern. In
addition to evaluating the underlying confirming evidence Exhibit 3 summarizes actions that boards can take to
provided by management, board members would want to mitigate bias caused by the four common judgment
consider the factors beyond management’s control that tendencies described earlier in this thought paper.
could intensify the liquidity crisis and threaten the viability

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16 | Enhancing Board Oversight: Avoiding Judgment Traps and Biases

Exhibit 3: Mitigating Biases Associated With Common Judgment Tendencies

Overconfidence Tendency
• Be aware
• Challenge expert’s or adviser’s estimates
—Potential causes of unexpected outcomes
—Estimates of unexpected outcomes
• Challenge extremely high or low estimates
• Challenge underlying assumptions

Confirmation Tendency
• Be aware
• Make the opposing case and consider alternative explanations
• Seek and consider disconfirming or conflicting information

Anchoring Tendency
• Be aware
• Make an independent judgment or estimate
• Consider relevant alternative anchors
• Solicit input from others

Availability Tendency
• Be aware
• Consider why something comes to mind (for example, vividness and/or recent events)
• Make the opposing case
• Consult with others
• Obtain and consider objective data

Encourage Opposing Points of View from others. After all ideas, issues, and concerns are
Making judgments in groups has the potential to greatly on the table, the group can then openly, objectively, and
improve judgment quality, but poorly structured group respectfully discuss and consider the required judgment.
interaction can actually exacerbate the traps and biases Such an approach can increase the effort and participation
previously discussed. Thus, group members should of fellow board members, encourage a broader and
not only consider the mitigation strategies previously more complete set of perspectives and alternatives, and
discussed but also take additional steps to protect and enhance the quality of final decisions. In addition, leaders
enhance the quality of group judgments. Groups facing should not only tolerate but explicitly and genuinely
difficult judgments can typically boost the quality of their encourage diversity of thoughts and opinions and open
judgments by having individual members carefully and sharing and full consideration of ideas and perspectives,
conscientiously prepare before the meeting and then, in especially those that go against the flow of the group’s
the meeting, by having each individual share his or her predominant views.
initial views openly without critique or qualification

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 Enhancing Board Oversight: Avoiding Judgment Traps and Biases | 17

Summary Observations
COSO recognizes the vital role of consistent, high-quality These tendencies can affect boards as they oversee
professional judgment as management and boards of management’s planning, fraud prevention, ERM, control,
directors execute and oversee an entity’s ERM, internal and execution activities.
control, and fraud deterrence efforts. Professional
judgment is increasingly important as board members Awareness of the common threats to good judgment
fulfill their responsibilities related to effective oversight is the key initial step in improving judgment. Board
of management’s strategic planning, execution, fraud members can use the insights summarized in this thought
prevention, and risk management processes. Even paper to test and improve the consistency and quality
seasoned board members can improve the consistency of management’s judgment processes and outcomes by
and soundness of their judgment by being aware of rigorously challenging perspectives and assumptions via
common judgment traps and by following a good judgment open and frank discussions. Such discussions can include
process. Such a process can help avoid threats to consideration of judgment traps, simplifying tendencies,
good judgment, including the biases related to common and alternative viewpoints. Board members who are aware
judgment tendencies or shortcuts. Exhibit 4 outlines of traps and tendencies that limit the quality of judgment
actions that boards can consider at each of the five steps can use these insights to challenge management’s
of the judgment process presented in exhibit 1. judgments and more effectively fulfill their oversight role.

Many board-level judgments are made in group settings,

and although group judgments are often better than
individual judgment, group judgments can fall victim to
narrow thinking; suppression of divergent views; and,
consequently, shallow judgment processes. Some common
tendencies that exhibit themselves in individual judgment
and that can lead to bias in board-level decisions are the
overconfidence tendency, the confirmation tendency,
the anchoring tendency, and the availability tendency.

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18 | Enhancing Board Oversight: Avoiding Judgment Traps and Biases

Exhibit 4: Summary of Key Considerations in Applying the Steps of Good Judgment

Step 1. Define the Problem and Identify Fundamental Objectives
• Obtain a thorough understanding of fundamental aspects of the judgment or decision.
• Develop specific objectives and relevant measurable criteria.
• Consider different perspectives or frames; challenge the current frame and seek input from those who
see the matter differently.
• Ask what and why questions to get to the root of the issue and the fundamental objectives.
• Be aware of common threats to judgment that may affect this step, including accepting management’s
frame, as well as biases and traps, such as the overconfidence tendency, the rush to solve,
and judgment triggers.

Step 2. Consider Alternatives

• Invest appropriate time and effort to consider different alternatives; ask how questions.
• Remember that a judgment can be no better than the best alternative considered.
• Seek input from others with different perspectives and apply alternative frames.
• Weight the alternatives in terms of how well they meet the objectives.
• Be aware of common threats to judgment that may affect this step, including judgment biases and traps,
such as the availability tendency and judgment triggers.

Step 3. Gather and Evaluate Information

• Gather the appropriate amount of relevant information.
• Consider the reliability, validity, certainty, and accuracy of the information.
• Identify and consider relevant technical literature and industry information.
• Assess the consequences associated with alternative approaches or options considered.
• Identify the alternative that best meets relevant objectives.
• Be aware of common threats to good judgment that may affect this step, including deadline pressure
or a biased information search introduced by the overconfidence, confirmation, anchoring, or
availability tendencies.

Step 4. Reach a Conclusion

• Before reaching a conclusion, ask whether a supportable process has been followed (that is, consider
steps 1–3), and if not, return to the appropriate previous step(s).
• Be aware of common threats to judgment that may affect this step, including conflict avoidance tendencies.

Step 5. Articulate and Document Rationale

• Consider the judgment with the end in mind of articulating the rationale, reflect on the steps of good
judgment, and consider whether a sound process was followed and whether judgment traps and biases
influenced the conclusion.
• Assess whether the conclusion makes sense and is supported by the underlying information.

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 Enhancing Board Oversight: Avoiding Judgment Traps and Biases | 19

References and Additional Resources for Interested Readers

Bazerman, Max H., and Don A. Moore. Judgment in Managerial Decision Making. 7th ed. Hoboken, NJ: John Wiley & Sons, 2009.

Drucker, Peter F. The Effective Executive. Burlington, MA: Elsevier, 1967.

Hammond, John S., Ralph L. Keeney, and Howard Raiffa. Smart Choices: A Practical Guide to Making Better Decisions. Boston:
Harvard Business School Press, 1999.

Russo, J. Edward, and Paul J. H. Schoemaker. Winning Decisions: Getting it Right the First Time. New York: Doubleday, 2002.

Schrand, Catherine M., and Sarah L. C. Zechman. “Executive Overconfidence and the Slippery Slope to Financial Misreporting.”
Journal of Accounting and Economics, forthcoming, 2012.

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20 | Enhancing Board Oversight: Avoiding Judgment Traps and Biases

About COSO
Originally formed in 1985, COSO is a joint initiative of five private sector organizations and is dedicated to providing thought
leadership through the development of frameworks and guidance on enterprise risk management (ERM), internal control,
and fraud deterrence. COSO’s supporting organizations are the Institute of Internal Auditors (IIA), the American Accounting
Association (AAA), the American Institute of Certified Public Accountants (AICPA), Financial Executives International (FEI),
and the Institute of Management Accountants (IMA).

About the Authors

KPMG LLP, the audit, tax, and advisory firm (www.kpmg.com/us), is the U.S. member firm of KPMG International
Cooperative (KPMG International). KPMG International’s member firms have 145,000 people, including more than 8,000
partners, in 152 countries.

Contributing authors from KPMG LLP include Sam Ranzilla, National Managing Partner, Audit Quality and Professional
Practice; George Herrmann, National Office Partner; and Rob Chevalier, National Office Partner.

Steven M. Glover, CPA, Ph.D., and Douglas F. Prawitt, CPA, Ph.D., are both chaired professors of
accounting at Brigham Young University. They are internationally respected scholars in the area of financial statement
auditing. Much of their research centers on business professionals’ judgment and decision making. Their research has
been published in the premier journals in their field, and they have taught a popular executive MBA course on effective
management judgment and decision making for many years. They have consulted extensively with a variety of accounting
firms and other large and small enterprises.

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Committee of Sponsoring Organizations
of the Treadway Commission

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 E n h a n c i n g
B oa r d
O v e r s i g h t

Avo i d i n g Judgment Traps and Biases

Committee of Sponsoring Organizations of the Treadway Commission

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