Hindsight Bias And Its Effect Essay

Question:

What is "hindsight bias," and how might it affect.

Answer:

Hindsight bias is a psychological term that is used in order to explain individuals’ tendency to overstate their ability to predict the outcome that was not possible to be predicted beforehand. For example, a boy passes the examination with good marks and his mother says that she predicted that her son will pass the examination with good marks. Therefore, it can be said that hindsight bias is a psychological bias that influence the people to over-represent their ability to predict something.

In 2004, it was identified that HealthSouth Corporation has conducted near about $4.6 billion accounting fraud. However, if the hindsight bias took place, then it might have been possible to protect the organization from this kind of accounting fraud. Hindsight bias is such a psychological ability that would have helped the internal auditors of HealthSouth Corporation and the higher financial authority of the company to predict the worst situation by identifying the financial ratios such as net margin, receivable turnover and assets turnover (Barry, 2009). Hindsight bias might have helped the higher authority to take proper decision and steps so that the accountants of the organization could improve their accounting calculations. Due to this, the financial ratios of the company might have been rechecked and the situation could be handled in better way (Weld, Bergevin & Magarth, 2004). Therefore, the company might not have to pay the penalty for accounting fraud. This would have helped the organization to maintain their reputation in the marketplace.

Reference list:

Barry, K. (2009). HealthSouth’s Corporate Accounting Scandal: A Case Study in Fraudulent Financial Reporting. Journal of Accounting Faud-at-HealthSouth.

Weld, L. G., Bergevin, M. & Magarth, L. (2004). Anatomy of a Fianncial Fraud. Journal of CPA.

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