Cognitive biases in critical decisions facing SME entrepreneurs: An external accountants' perspective

Nuijten, Arno; Benschop, Nick; Rijsenbilt, Antoinette; Wilmink, Kristinka Article Cognitive biases in critical decisions facing SME entrepreneurs: An external accountants' perspective Administrative Sciences Provided in Cooperation with: MDPI – Multidisciplinary Digital Publishing Institute, Basel Suggested Citation: Nuijten, Arno; Benschop, Nick; Rijsenbilt, Antoinette; Wilmink, Kristinka (2020) : Cognitive biases in critical decisions facing SME entrepreneurs: An external accountants' perspective, Administrative Sciences, ISSN 2076-3387, MDPI, Basel, Vol. 10, Iss. 4, pp. 1-23, https://doi.org/10.3390/admsci10040089 This Version is available at: https://hdl.handle.net/10419/240079 Standard-Nutzungsbedingungen: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. 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If the documents have been made available under an Open Content Licence (especially Creative Commons Licences), you may exercise further usage rights as specified in the indicated licence. https://creativecommons.org/licenses/by/4.0/ administrative sciences Article Cognitive Biases in Critical Decisions Facing SME Entrepreneurs: An External Accountants’ Perspective Arno Nuijten 1,2,* , Nick Benschop 1, Antoinette Rijsenbilt 1and Kristinka Wilmink 1 1Erasmus School of Accounting and Assurance, Erasmus University, 3000 DR Rotterdam, The Netherlands; [email protected].nl (N.B.); [email protected].nl (A.R.); [email protected] (K.W.) 2Department of Information Science, Open University, 6419 AT Heerlen, The Netherlands *Correspondence: [email protected].nl Received: 18 September 2020; Accepted: 1 November 2020; Published: 5 November 2020   Abstract: Decisions by small and medium enterprise (SME) entrepreneurs are plagued by a variety of cognitive biases. Extant literature has mainly focused on a limited number of important biases (e.g., overconfidence) in a handful of important entrepreneurial decisions (e.g., start-up, market entry or exit). However, putting the spotlight on a few important biases and entrepreneurial decisions could leave other important biases and decisions underexposed. SME accountants are in a unique position to shed a broader light on this issue. SME entrepreneurs often seek advice of their accountants when they struggle with decisions that involve uncertainty and business risks in the domains of strategy, regulatory compliance, human resources, IT, and succession. In this study, we explore 12 different biases and analyze whether their importance can change across these decision domains. Interviews were performed with 14 SME accountants who provide an independent third-party view on decision making by over 3000 entrepreneurs. Our findings suggest that the importance of most of these biases varies from one decision domain to the other. We also identified four approaches (warn, inform, intervene, and coach) that accountants can take when entrepreneurs may fall victim to biases. We discuss the implications for research and practice of SME entrepreneurs and their accountants. Keywords: SME entrepreneurs; accountants; cognitive biases; decision making; debiasing 1. Introduction Entrepreneurial decision making is a challenging task. The context in which entrepreneurs make decisions is extreme in various ways: high uncertainties and ambiguities, high consequences, time pressures, emotional anticipation, and reactions (Shepherd et al. 2015). Theory on bounded rationality (Simon 1947) suggests that in these types of decision environments, rational decision-making processes (referred to as system 2 by Stanovich and West 2000) are often pushed beyond their capabilities. When system 2 gets overwhelmed, decisions are dominated by the experiential and intuitive decision-making processes (referred to as system 1). Unfortunately, these system 1 decisions are prone to cognitive biases that can cause irrational decision making. As one solution to cope with the limitations of bounded rationality in organizational decision making, Simon (1947) introduced the idea of the so-called ‘administrative man’. The administrative man, or woman, is someone who helps to provide organizations with objective and unbiased information to support decision making. In line with this, Kahneman et al. (2011) recommend that for critical decisions, such as the introduction of new products, organizational decision makers should seek advice from an external party. Such a third party could contribute to more rational decision making by challenging assumptions and by uncovering potential biases in the decision-making process. A third-party role could therefore be of pivotal value to identify cognitive biases in entrepreneurial decision making (Abatecola et al. 2018, p. 412). External accountants fulfil this role for many small and medium enterprise (SME) entrepreneurs. They Adm. Sci. 2020,10, 89; doi:10.3390/admsci10040089 www.mdpi.com/journal/admsci Adm. Sci. 2020,10, 89 2 of 23 are frequently sought for advice—and invited to challenge the entrepreneur—when entrepreneurs face critical decisions (Bennett and Robson 1999;Berry et al. 2006;Blackburn and Jarvis 2010; Suddaby et al. 2002). Therefore, SME accountants are in a unique position to provide insight in the way SME entrepreneurs make decisions across a variety of domains for which they seek the advice of their accountant. To the best of our knowledge, our study is the first to examine biases in entrepreneurial decision making from the perspective of SME accountants. Following a similar approach, in the business research domain of managing complex IT projects, insights from practitioners in a third-party role (i.e., information systems auditors) were used to shed light on cognitive biases (Keil and Robey 1999; Keil et al. 2000;Nuijten et al. 2019). In this study, we propose that this third-party view offered by seasoned SME accountants could similarly provide a contribution to extant literature on entrepreneurial decision making. Results from interviews with 14 Dutch SME accountants, seasoned in this role and who combined have serviced over 3000 SME entrepreneurs over the years, provide a view from a third-party perspective on how these entrepreneurs make decisions. Following a deductive thematic analysis approach, we examine how 12 documented cognitive biases compare to each other in how important they appear to be in SME entrepreneurs’ decisions. This comparative view across multiple cognitive biases contributes to the existing body of knowledge since many studies in this domain focus on one or two individual biases in isolation. While extant literature on cognitive biases in entrepreneurial decision making has predominantly focused attention on entrepreneurs’ overconfidence, our results suggest that other biases could warrant more research attention as well. Furthermore, the findings from our study suggest that the importance of many of those cognitive biases on entrepreneurial decisions varies across five decision domains for which entrepreneurs seek advice of their external accountants. These results contribute to the discourse since most of the extant studies depict entrepreneurial decisions as strategic investment decisions (start-up, market entry) or exit decisions. Our results however suggest that entrepreneurs might struggle with cognitive biases across a wider range of critical decisions that involve business risks (other than strictly financial). Finally, our interviews showed four different approaches (warn, inform, intervene, and coach) that SME accountants take when they encounter cognitive biases in entrepreneurial decision making. The remainder of our paper is organized as follows: In Section 2, we describe the theoretical background of our study. In Section 3, we discuss how the data for our study were collected and analyzed. Section 4provides an overview of our research results. Finally, we conclude with a discussion of the implications of our study for both research and practice in Section 5. 2. Theoretical Background 2.1. Research on Cognitive Biases in Entrepreneurship Research on cognitive biases in entrepreneurship has increased rapidly since its inception in the early nineties and in two decades it has become an important research area for entrepreneurship (Zhang and Cueto 2017). From their structured literature review of research on entrepreneurial biases, Zhang and Cueto (2017) also portray the research domain (in our words) as fragmented: a lack of consistent use of definitions, showing overlap and redundancy in biases (like overconfidence and overoptimism). The figures in their review, as well as their analysis, also indicate a very high representation of in-depth studies that put the spotlight on individual ‘popular’ cognitive biases (like overconfidence) 1 . Furthermore, after they defined a typology of cognitive biases to structure their assessment, Zhang and Cueto (2017) identified a need for research on relatively underexposed 1 The literature review by Zhang and Cueto (2017) shows that 33 out of 41 papers focused on one single cognitive bias, 5 papers examined two biases and no papers investigated more than four biases in one study. More than half of all papers examined overconfidence or overoptimism. Adm. Sci. 2020,10, 89 3 of 23 biases related to emotions (for example on affect heuristic) or biases related to the social context of the entrepreneur (environmental pressure). Since the literature review by Zhang and Cueto (2017), we are aware of only one paper (Abatecola et al. 2018), who examined a combination of multiple cognitive biases, (including one associated with affect heuristic), and how they are related. The tables in the review by Zhang and Cueto (2017), show that a large portion of the research on entrepreneurial biases examined specific biases in the context of strategic investment decisions (start-up, market entry) or exit decisions (disinvestments). While there is no doubt that those financial decisions have been proven to be very good candidates to examine cognitive biases in entrepreneurial decision making, this spotlight approach could raise the issue whether other entrepreneurial decisions involving business risks and uncertainties might be underexposed. Furthermore, it could raise the issue whether the importance of specific biases in strategic investment decisions carries to other domains of entrepreneurial decisions as well. In our attempt to supplement the many valuable spotlight studies in this domain, we aim to shed broader light on these issues. Therefore, we explore the importance of a series of (12) cognitive biases across a broader range of entrepreneurial decisions that involve business risks and uncertainties and for which decisions entrepreneurs seek external advice from their accountants. From their third-party role, accountants are in the position to have an overview of various types of decisions that entrepreneurs struggle with and seek advice for, as well as the cognitive biases that entrepreneurs may fall victim to in those decisions. Interestingly, a very recent conceptual study by Liebregts et al. (2020) confirms that people in the social context of entrepreneurs (like the accountants in our study) and who can observe entrepreneurs in their decision making processes, are in a unique position to examine cognitive biases and Liebregts et al. (2020) find this a promising avenue to advance our understanding of entrepreneurial decision making. Before we further elaborate the literature background of the decisions and the cognitive biases that we included in our study, we first define the two concepts—biases and heuristics—that we put central. Bias refers to the systematic deviation from rational choice theory when people choose actions and estimate probabilities (Tversky and Kahneman 1974). Heuristics refer to simplifying shortcuts or principles that people use for problem solving and information processing (Baron 2007). Heuristics are fast and frugal, freeing people from making complete and systematic and effortful processing of information. As heuristics simplify information processing, they are associated with biases. Both biases and heuristics are part of what Stanovich and West (2000) referred to as experiential and intuitive decision-making processes (labeled as system 1). Although biases are portrayed as deviations from rationality, we do not take the position that biases are always bad. Moreover, while it has been documented that biases influence risk perceptions as well as decisions that involve risk, the desirability of biases should be considered in the context of the risk appetite (or desired risk-taking behavior) of the organization (Croce et al. 2020). We think this warrants the value of our study to explore whether cognitive biases are equally important across different domains of entrepreneurial decisions that involve business risk and uncertainties. In the remainder of this section, we use the third-party stance of the SME accountant to develop our theoretical background. First, we describe for what kind of decisions entrepreneurs seek the advice from their accountants and we clustered those decisions to domains. Next, we determine a list of cognitive biases from literature that we can use for the purpose of our study and that allows us to exploit the unique position that accountants have to observe cognitive biases in entrepreneurial decision making in real-life situations. 2.2. Domains of Decisions for Which SME Entrepreneurs Seek Advice from Accountants Table 1provides an overview of literature and shows the various decisions for which SME entrepreneurs seek advice from accountants. Based on this overview of the existing literature, we have identified five decision domains that accountants are involved in as advisors. Table 1shows how Adm. Sci. 2020,10, 89 4 of 23 each of the various types of decisions from prior literature have been mapped to the following five decision domains: i. Strategy (e.g., advice on finances, business structuring, business transfers etc.) ii. Regulatory compliance (e.g., taxes, (ISO) compliance, health and safety etc.) iii. Human Resources (e.g., payroll, training and development, recruitment etc.) iv. Information Technology (e.g., information system implementation, security, IT system support) v. Succession planning (e.g., inheritance, ownership transfer etc.). Table 1. Types of decisions in which entrepreneurs seek advice of accountants Study: Types of Decisions: Gooderham et al. (2004) (i).* business structure (company set-up), budgeting, marketing/sales, strategic planning, valuation of firms/mergers/demergers, (iii). pension schemes, management, organization, HRM, training and skills development, remuneration schemes, salary, (iv). implementation administrative routines, IT, (v). inheritance, generation transfer, owner transference Berry et al. (2006)(i). business advice, emergency advice, financial management, (ii). statutory services Blackburn et al. (2006)(ii). regulations and compliance, (iii). advice on employment and payroll Van Teeffelen (2006)(v). business transfers Leung et al. (2008)(ii). regulatory compliance, health and safety, environment Doving and Gooderham (2008) (i). closure of firms, (ii). tax/tax planning, type of company entity, (iii). recruitment Devi and Samujh (2010) (i). business formation, business plans, business valuation, due diligence, financing arrangement, liquidation/corporate recovery, mergers/acquisitions, strategic planning, (ii). compliance, filing of tax returns, ISO standards internal control systems, forensic accounting, internal audit, statutory audit, (iii). loan application, payroll, recruitment, secretarial services, (iv). IT system implementation Hasle et al. (2010)(ii). health and safety, employment Blackburn and Jarvis (2010) (i). acquisition and new business advice, financial modeling, business structuring, purchase and sale of business, planning and forecasting, business strategy, financial advice, due diligence, investment strategy, (ii). forensic accounting, asset protection (iii). HR, payroll, company secretary, (iv). IT, (v). retirement planning, succession planning Jarvis and Rigby (2012)(iii). HR and employment issues Ismail and King (2014)(iv). IT system advice and support * Roman numerals indicate to which of the five decision domains, described in the text above, each specific decision type has been assigned. 2.3. Cognitive Biases That Can Affect SME Entrepreneurs To serve the purpose of our study, we selected a set of appropriate cognitive biases following an approach that is similar to the one that was followed by Cristofaro (2017). Since our research design required in-depth interviews with SME accountants, we decided that 60 topics would be our maximum (12 biases across 5 decision domains). Therefore, we limited ourselves to 12 biases so that it would remain possible to interview respondents in one interview. Given the design of our study, biases should show in practice and must be recognized and easily distinguished by accountants from a third-party stance. We derived our set of biases from an initial literature review on SME entrepreneurial biases and we tested and refined the set of biases in our pilot with SME accountants. We also asked them whether important biases were missing. At the time we set up our study, we were not familiar with the list of important biases that Zhang and Cueto (2017) derived from SME literature. Nevertheless, we have 8 out of 12 biases in common with their list. Four biases from their list are not in ours, and we think for good reason, since they appeared to be conceptually confusing for our respondents (too proximate with other biases we did include). From their list we did not have in ours: law of small numbers (could be confused with representativeness bias), self-serving attribution (is more hindsight to the decision, and could be confused Adm. Sci. 2020,10, 89 5 of 23 with confirmation bias and illusion of control), similarity (could be confused with confirmation bias and affect heuristic), and over-optimism (could be confused with overconfidence). Furthermore, we included four biases that were not in Zhang and Cueto’s list. First, we included the more generic confirmation bias, that covered the more situated bias similarity in Zang and Cueto’s list. Next, we included groupthink which blends well with Zhang and Cueto’s call to examine biases related to the entrepreneurs’ social context. The accountants in our pilot mentioned that many entrepreneurs participate in entrepreneurial network events from Rotary, Lions and alike. There they discuss and exchange business decisions to larger extent and get influenced by other entrepreneurs as well as some entrepreneurs get influenced by family members who are or have been involved in the SME. We also included two biases that were not in Zhang and Cueto’s list but which blend well with their call to do further research on biases that are associated with SME entrepreneurs’ emotions. We added affect heuristic that taps into the happiness emotion (proposed by accountants who told of entrepreneurs who felt in love with their products and company). And finally, our fourth added bias is regret that taps into the fear emotion of ‘missing the boat’, which was also mentioned by the accountants in our pilot. Following this approach, we arrived at the set of 12 cognitive biases and heuristics that we will briefly introduce. 2.3.1. Bias #1: Anchoring Anchoring is a heuristic that influences one’s intuitive judgment. Individuals subconsciously base their decisions on a reference point, the so-called anchor, and subsequently make adjustments to this initial anchor to come to their estimation or judgment. However, these adjustments are often insufficient causing the ultimate outcome to be biased towards the initial anchor, thereby limiting rational decision making (Tversky and Kahneman 1974). For example, in negotiations, the first offer made forms the anchor, causing the outcome of the negotiations to be strongly influenced by the first offer (Galinsky and Mussweiler 2001). Similarly, the entrepreneurial decision of whether to start a new venture has also been found to be subject to the anchoring bias (Barbosa and Fayolle 2007). 2.3.2. Bias #2: Availability Heuristic The availability heuristic is a mental shortcut where prior examples that easily come to mind can receive disproportionate weight in decision making (Tversky and Kahneman 1973; Palich and Bagby 1995). As such, strongly positive or negative experiences, which come to mind easily, can strongly bias the decision-making process. Recent experiences have also been shown to come to mind more easily than experiences from a long time ago. In this context, entrepreneurs have been found susceptible to the availability heuristic in a study which showed that the decision of whether to found a new venture was strongly biased based on recent experiences (Barbosa and Fayolle 2007). 2.3.3. Bias #3: Confirmation Bias The confirmation bias causes individuals to look for information that supports their opinion or decision, while disregarding information that is contradicting (Baron 2004). Entrepreneurs have been found to be prone to the confirmation bias, particularly when they have not experienced failure before. These entrepreneurs tend to overestimate their own previous successes, focusing on positive information and thereby rejecting disconfirming evidence (Carr and Blettner 2010). 2.3.4. Bias #4: Regret and Counterfactual Thinking Counterfactual thoughts are thoughts that form an alternative to past events or situations, whereby one thinks about “what could have happened if . . . ”. This can lead to forming alternative strategies for the future, which in turn can influence decision making processes (Baron 2013). Related to counterfactual thinking is the concept of regret, a counterfactual emotion, which is also strongly associated with decision making. Mullins and Forlani (2005) and Zeelenberg (1999) documented the regret effect in the field of new venture decisions and SME as the ‘fear of missing the boat’. Family firms are more prone to regret in Adm. Sci. 2020,10, 89 6 of 23 terms of family-based circumstances as well as business-related regret. The experienced regret in a family firm has been found to bias decision making (Hirigoyen and Labaki 2012). 2.3.5. Bias #5: Escalation of Commitment Escalation of commitment occurs when decision makers overcommit to a previously chosen course of action, despite negative feedback indicating that this will not lead to success (Staw 1976). The longer people continue along the same path, the more difficult it generally becomes for them to change direction (Drummond 2004). Escalation of commitment in the context of SME’s is primarily caused by a shortsighted vision as well as by the mixing of economic and personal interests (Drummond 2004). Furthermore, entrepreneurs are often highly dedicated to making their firm a success, which can hamper their ability or willingness to recognize that they, or their firm, are currently on a failing course of action. As long as this is not recognized, entrepreneurs are prone to escalation of commitment (Baron 1998). 2.3.6. Bias #6: Illusion of Control The illusion of control bias occurs when people overestimate the amount of control that they have over a situation. It specifically constitutes an ‘illusion’ of control in the case where someone believes to have control even over those outcomes which are objectively outside of their control (Langer 1975). Entrepreneurs have been shown to be more inclined to overestimate the amount of control that they have. Due to this illusion of control they tend to underestimate risks, since they believe their own skills can prevent potential negative outcomes (Keh et al. 2002;Le Roux et al. 2006). 2.3.7. Bias #7: Overconfidence In the context of our study, overconfidence comes in the form of the tendency to overestimate the correctness of an initial assessment in relation to complex situations (Busenitz and Barney 1997). Whereas the illusion of control relates to the false belief of having control over situations outside one’s control, overconfidence relates to overestimating one’s personal chances of success in any situation. Entrepreneurs have been found to show more overconfidence than managers in large organizations (Busenitz and Barney 1997;Forbes 2005). This has been related to differences in individual characteristics and the complexity and uncertainty that many entrepreneurs face, amongst others (Forbes 2005). 2.3.8. Bias #8: Planning Fallacy The planning fallacy is associated with overoptimism in estimations about the amount of work that can be completed within a certain time period (Baron 1998;Kahneman and Lovallo 1993). This is often the result of assuming ideal circumstances or of underestimating or not accounting for events or risks that can add to the workload. The planning fallacy is more likely to occur in environments which are characterized by new and unique situations including a lot of uncertainty. These are also the types of environments that entrepreneurs operate in. Similarly, entrepreneurs have a more difficult time basing their estimations on prior experiences, an approach which has shown to reduce the planning fallacy (Kahneman and Lovallo 1993), due to the typically smaller size and younger age of the firm (Baron 1998). 2.3.9. Bias #9: Representativeness Bias The representativeness bias can make decision makers falsely assume that limited experiences can be generalized and apply in all instances. Recognizing elements of past experiences in new situations can lead decision makers to incorrectly draw analogies and assume the same result will be achieved once more (Schwenk 1984). Busenitz and Barney (1997) conclude that entrepreneurs are more subject to the representativeness bias than managers in large organizations. Simon et al. (2000) argue that entrepreneurs are prone to the representativeness bias because they lack past examples on which to Adm. Sci. 2020,10, 89 7 of 23 base estimations, forcing them to rely on the limited amount of data that they do have, which can lead to oversimplified analogies of complex situations. In line with this, Mehrabi and Kolabi (2012) show that representativeness negatively influences the quality of strategic decisions by entrepreneurs. 2.3.10. Bias #10: Status Quo Bias The status quo bias is a tendency to stick to previously made choices and decisions, thereby sticking with and being unwilling to deviate from past decisions either made by yourself or by someone else, even if this is no longer rational (Burmeister and Schade 2007). Burmeister and Schade (2007) argue that entrepreneurs are not necessarily more prone to the status quo bias than other decision makers. However, they do argue that the status quo bias is more likely to occur in decisions or situation that the decision maker has a lot of experience with. Previous experience leads to a reduction in flexibility and a less varied range of potential choices (Burmeister and Schade 2007). In line with this, Gibbons and O’Connor (2005) found that the experience of SME CEO’s was positively related to their commitment to the status quo. 2.3.11. Bias #11: The Affect Heuristic Often, decisions are not made mostly based on the objective weighting of pros and cons but rather on how “good” or “bad” something feels, i.e., we buy the products, or hire that people, that we “like”. This is referred to as the affect heuristic. Such affective reactions have been found to be important in decision making by entrepreneurs (Baron 2008) and entrepreneurs are often passionate people who follow their emotions (Cardon et al. 2009). In line with this, Nouri et al. (2017) describe that entrepreneurs may be particularly susceptible to the affect heuristic. For example, affect has been shown to have an influence on entrepreneurial opportunity evaluation (Foo 2011) and the pursuit of entrepreneurial ideas and even the decision to become an entrepreneur and start a business (Hayton and Cholakova 2012). 2.3.12. Bias #12: Groupthink Whereas the previous biases are all focused on decision making by the individual, groupthink is a bias which can occur when people make decisions in a group. Groupthink originates from the human tendency to not want to go against the group. Groupthink occurs when “the members’ strivings for unanimity override their motivation to realistically appraise alternative courses of action” (Janis 1972, p. 9). Groupthink tendencies in entrepreneurial teams can threaten entrepreneurial adaptation and renewal of the firm (Kor et al. 2007). In high-velocity environments (Bourgeois and Eisenhardt 1988), a free exchange of views among entrepreneurs is preferred to conformist thinking (Hambrick 1995). 3. Method 3.1. Research Design In order to explore the importance of the 12 identified biases in each of the 5 decision domains, we performed in-depth interviews with 14 accountants who have experienced biases in SME decision making firsthand. In these structured interviews we collected both qualitative and quantitative data regarding the importance of each bias in the various decision domains. Following a deductive thematic analysis approach, we collected and analyzed these data as we will describe further in Section 3.3. Repeated Measures ANOVAs were performed to assess whether the importance of each bias differed across decision domains. 3.2. Interviewees Fourteen experienced accountants were recruited to participate in the interviews. These SME accountants were recommended to us, by the Dutch association of Public Accountants, for their extensive experience with SME entrepreneurs. Prior to starting the interview, we first asked each Adm. Sci. 2020,10, 89 8 of 23 accountant to what extent they had experience with the type of decisions involved in our study. Table 2provides relevant characteristics of the interviewees, which they provided upon request. The Table lists the amount of years the respondents have been acting in this role, the sectors in which their customers are active, and the number of SME entrepreneurs that have sought their advice. Our interviewees had an average of 20 years of experience and they advised 200 entrepreneurs on average. The combined experience of all 14 interviewees together reflects decisions made by more than 3000 SME entrepreneurs cumulated. Table 2. Characteristics of our interviewees. Accountant Years of Working Experience with SME Entrepreneurs Estimated Number of SME Entrepreneurs Sectors in which the SMEs Were Active (Predominantly) #1 21 >100 Trade, manufacturing, services #2 18 >100 Hotel, catering, manufacturing, services #3 11 >100 Building, transportation, manufacturing, wholesale #4 22 300 Mostly flowers and food #5 32 >300 Manufacturing, wholesale, retail, transportation, agriculture #6 34 300 Construction, manufacturing, services, wholesale, retail, hotels #7 20 100 Retail, manufacturing, construction, hotels and restaurants #8 29 200 Services, manufacturing, wholesale, retail, restaurants #9 15 >100 Construction, manufacturing, automotive, retail #10 17 >300 Construction, agriculture, retail, manufacturing #11 31 >300 Retail, manufacturing, automotive, wholesale #12 34 250 Retail, wholesale, manufacturing, hotels and restaurants #13 22 >300 All types of SMEs except agriculture #14 37 >300 Retail, manufacturing, services, food 3.3. Materials Development and Pilot Testing Interview materials were prepared to facilitate the collection of the intended qualitative and quantitative data. Since interviewees were asked to provide us with input on 12 different biases, we prepared plasticized cards with information on each of the biases. These cards contained the name of the bias, a brief description of the bias and an illustration associated with the bias. In this way, the interviewees could refer to the biases and their descriptions at any time during the interview. A pilot test with 3 accountants (who were excluded from our sample for the main study) was used to assess whether the descriptions and illustrations on these cards were clear and understandable to our target sample. Based on the pilot a few minor changes were made to the wording on the cards and to two of the illustrations. In a similar way, we prepared 5 plasticized cards that represent the decision domains discussed in Section 2, i.e., strategy, regulatory compliance, human resources, information technology and succession planning. Each of these cards provided a brief description of the domain, as well as a few examples of decisions within this domain. These cards were also pilot tested with 3 accountants. The accountants recognized and validated the decision domains included in our study. Input obtained from the pilot test allowed us to make a few minor refinements to the wording on the cards prior to the subsequent 14 interviews. 3.4. Data Collection and Analysis Our interview data were structured and analyzed using thematic analysis. Specifically, we performed a deductive, or theory-driven, thematic analysis approach (Boyatzis 1998;Braun and Clarke 2012). In doing so, we followed an approach similar to that of Cristofaro (2017), who also applied a Adm. Sci. 2020,10, 89 15 of 23 4.3.5. The Importance of Biases in the Succession Planning Decision Domain Biases were considered to be fairly important in the succession planning decision domain, as shown in Table 3(mean: 3.32/5). Respondents indicated that the succession decisions have such large consequences (i.e., pensions, stakeholders) that dedicated accountants are often involved, who can help the SME entrepreneur to make well-informed, rather than biased, decisions. At the same time, these decisions involve many of the same subjective considerations that play a role in the HR decision domain, as well as the high level of uncertainty and impact that is present in the strategic decision domain. In addition, these decisions have a big impact on the SME entrepreneur personally. These factors may all increase the likelihood of biases occurring, for example, in relation to the assessment of one’s own capabilities and those of the potential successor(s). This may especially hold true for family-owned SME’s since family relations are often intertwined with positions in these firms. The status quo bias was ranked as the most important bias (mean: 4.18/5). Our respondents provided many examples of SME entrepreneurs who found it very difficult to detach from the company that had been part of their lives for so many years and who often postponed the difficult decision to make such drastic changes in a situation that existed for so long. As such, they often stayed at the helm for longer than was desirable, or rational. The affect heuristic, the second most important bias in this decision domain (mean: 4.14/5), played a similar role. The interviewees argued that their customers are often emotionally attached to their organization, citing SME entrepreneurs who talk about ‘this beautiful company’, ‘these wonderful people’, and ‘our unique products’. This too, can be a barrier to leaving the company, even if this is the best course of action. The affect heuristic can also bias the assessment of who would make the best example—for example one of the children. Our respondents ranked planning fallacy as the third most important bias (mean: 4.11/5). Entrepreneurs often underestimate the time and effort that is needed to prepare for and implement the succession. Additionally, since they may have postponed the succession decision for too long, due to the aforementioned biases, there is often not enough time left to make proper arrangements. 4.4. Actions That SME Accountants Could Take When Faced with These Biases In addition to information about the importance of these biases across the five decision domains, our interviewees also provided us with insights about actions that SME accountants could take when faced with these biases by SME entrepreneurs. In this subsection, we will discuss and categorize these proposed actions. The accountant is in a unique position to guard SME entrepreneurs from the harm to the enterprise that may result from irrational and biased decision making. The information provided in our paper can help SME accountants to recognize the most prominent biases in each of the decision domains. However, while awareness and recognition of such biases is a necessary precondition for dealing with them, recognition alone does nothing to stop the harmful effects of biases. Prior research has shown that external advice, i.e., from someone outside the organization, can be valuable. Such external advice has been found effective in reducing the illusion of control bias, for example. Internal advice was shown to be less effective and in fact even increased the bias (Meissner and Wulf 2016). Similarly, the seeking of outside advice has shown to reduce escalation of commitment (Hammond et al. 2006). Reducing the effects of biases is also called debiasing (Fischhoff1982). Debiasing by an outsider—such as the accountant—can be achieved in several ways, such as by giving warnings, information, by intervening, or by providing coaching or mentoring. The debiasing approaches emerged from the question to our interviewees what actions they would recommend to their peer accountants when they deal with an SME entrepreneur who falls victim to biases. The four approaches are discussed in more detail in the following paragraphs and we briefly reflect on them from debiasing literature. Which debiasing approach is most appropriate and successful according to our interviewees, depends, in part, on the specific relationship that the SME accountant has with the SME entrepreneur. Adm. Sci. 2020,10, 89 16 of 23 4.4.1. Debiasing by Giving Warnings Our interviewees suggested that the accountant can warn SME entrepreneurs of important biases in a specific decision domain, prior to them occurring. While a warning in advance may prevent the entrepreneur to fall victim to a bias, it is important that the warning is given by the right person, in the right way and at the right time. Another bias, the deaf effect, where receivers of messages irrationally do not hear, or listen to, warnings, can manifest itself otherwise. In some cases, such warnings may even be counterproductive (Keil and Robey 1999;Nuijten et al. 2016). The accountant could be the right person to give such a warning, but only if the specific relationship that the accountant and the SME entrepreneur have is suitable for it. Prior literature has shown that such warnings are effective if the messenger is perceived to be a partner, who is giving the message with the intention to help, but less effective otherwise (Nuijten et al. 2016). Thus, this approach is suitable specifically when the SME entrepreneur perceives the SME accountant in such a way and if their relationship allows for the giving of such well-intended advance warnings. The findings from our study may be valuable to accountants in this role since they provide insight into which biases are most important in a specific decision domain. As such, the accountant could focus on providing warnings for those biases which are most important for the decision at hand. 4.4.2. Debiasing by Giving Information to Help Recognize or Reduce the Impact of Biases This approach focuses on reducing the effects of a bias by providing information that can help reduce the bias, and promote rational decision making, at the right time. This can be effective at the time when an SME entrepreneur is considering his decision and the accountant suspects that a bias might play a role. Some interviewees suggested that, to aid in the decision-making process, the accountant could provide information about the most relevant biases that apply to these types of decisions as well as information on the impact of these biases or how to recognize them (i.e., symptoms of the bias). With this information, the SME entrepreneur may realize that they have fallen victim to this bias, or, they may recognize symptoms of these biases if they risk falling victim to them in the future. On multiple occasions, this was referred to during the interviews as ‘holding up a mirror’. Similarly, several interviewees mentioned that it was important for accountants to inform the SME entrepreneurs of the risks and impact associated with a specific decision, if it seemed that the entrepreneur was not fully aware of them. The information provided in our study can aid accountants by identifying which specific biases they should look out for and should discuss with the SME entrepreneur. Furthermore, the accountant and entrepreneur could agree on the usage of checks for these biases, specific critical questions that an accountant can routinely ask prior to making the final decision aimed at detecting potential biases in the decision-making process. They can also discuss potential actions that are advisable of signs of a bias are detected. One interviewee indicated that the use of such protocols by accountants can be helpful and several interviewees also discussed the importance of the accountant providing the right information but also of asking the right questions. This suggestion aligns with what is known about reducing biases from literature. For example, prior research has established that the status quo bias can be reduced by explicitly thinking about, and taking into consideration, alternative courses of action and by critically considering whether the status quo will actually help achieve them (Hammond et al. 2006). Other studies have shown that drafting a checklist of information relevant to the decision, prior to making the decision, can help ensure that decisions are based on the right information and are not biased by the availability heuristic (Kahneman et al. 2011). The accountant could advise the entrepreneur to consider such aspects in their decision. As stated, the effectiveness of this approach depends on the nature of the relationship that the SME entrepreneur and accountant have. This approach seems to fit especially when the entrepreneur needs an accountant who is mainly focused on business support of the entrepreneur with interpretation of figures and provides insight into the impact of choices. Adm. Sci. 2020,10, 89 17 of 23 4.4.3. Debiasing by Intervening when an SME Entrepreneur Falls Victim to a Bias This is a reactionary approach, where the accountant responds when they have strong suspicions that an SME entrepreneur has fallen victim to a bias. This response could take the form of trying to make the entrepreneur aware of the bias that they have fallen victim to, warning them of the potential negative consequences of the bias, and advising them on actions that could be taken to reduce the impact of the bias. For example, prior research suggests that the effects of anchoring can be reduced by challenging the decision maker to consider an alternative point-of-view. This can reduce the effect that an anchor has on the decision (Mussweiler et al. 2000;Galinsky and Mussweiler 2001). Such a perspective taking has been shown to be an effective strategy in reducing biases in general (Kahneman et al. 2011). This situation is of course precarious because the accountant should not want to be perceived as sitting in the entrepreneur’s chair. As such, the relationship that the accountant and SME entrepreneur have should be suitable for performing such interventions. As such, this approach is likely most appropriate for an entrepreneur who values an accountant who is sometimes willing to take on the additional role of a ‘strict friend’. 4.4.4. Debiasing by Coaching and Mentoring The approach of coaching implies a more extensive program of feedback to combat biases in practice (Fischhoff1982). This constitutes a more holistic approach which utilizes elements from the previously described approaches, where and when appropriate, depending on the specific context and the relationship with the SME entrepreneur. As with the first approach, the accountant can share knowledge about the most important biases in specific decision domains with clients from the SME practice, illustrated with anonymized examples from practice, prior to biases occurring. This could not only help prevent entrepreneurs falling victim to these biases later, but it can also create a basis for future discussion about the subject of biases with these clients. Thus, making it easier to give warnings (approach #2) or intervene (approach #3) at a later time, if the accountant is concerned about the entrepreneur falling victim to a specific bias. Furthermore, prior research has shown that such group discussions or group decision making can reduce the effects of biases (Hammond et al. 2006). Of course, not every SME entrepreneur will desire or appreciate their accountant taking on the role of a coach of mentor. Additionally, even if they do desire it, this cannot be forced—such a relationship must develop over time. 5. Discussion & Implications 5.1. Implications for Research While SMEs have been a subject of investigation of cognitive biases for decades, our exploratory study has three main contributions. To our knowledge this study is the first to examine cognitive biases in entrepreneurial decision making from the perspective of SME accountants. SME entrepreneurs often seek the advice of their accountants when they struggle with critical decisions that involve uncertainty and business risks (Bennett and Robson 1999;Berry et al. 2006;Blackburn and Jarvis 2010; Suddaby et al. 2002). This can involve a large variety of decisions regarding strategy, regulatory compliance, human resources, IT, and succession. It is acknowledged that involving a third party could contribute to more rational decisions, since someone in that position can challenge assumptions and uncover potential biases in the decision-making process (Kahneman et al. 2011). A third-party role therefore could be of pivotal value to identify cognitive biases in entrepreneurial decision making (Abatecola et al. 2018, p. 412). External accountants fulfil this role for many small and medium enterprise (SME) entrepreneurs. Therefore, SME accountants are not only in the position to help SME entrepreneurs make more rational decisions, but they could also serve as a valuable source of information for research in the domain of entrepreneurial decision making. They are in the position to directly observe how entrepreneurs make decisions in real-life situations and they could identify Adm. Sci. 2020,10, 89 18 of 23 cognitive biases when they occur. Direct observation of entrepreneurial decision making could be a fruitful way to study cognitive biases (Liebregts et al. 2020). SME accountants who are external to the SME and advise hundreds of entrepreneurs over a long period of time, therefore could offer valuable insights of how cognitive biases affect SME entrepreneurial decision making. Although our study is exploratory by nature, we think it confirms the value of using SME accountants as a source of information. The second contribution of our study exploits the use of SME accountants who are consulted by entrepreneurs for a variety of decisions. This allowed us to shed a broader light on an issue that is related to how the research stream on cognitive biases in entrepreneurial decision making has unfolded. A literature review by Zhang and Cueto (2017) shows that research in the domain of entrepreneurial decision making has emphasized a number of important biases (e.g., overconfidence) in a handful of specific and important entrepreneurial decisions (e.g., start-up, market-entry or exit). However, putting the spotlight on a few specific biases and entrepreneurial decisions could leave other important biases and decisions underexposed. Since the SME accountants in our study advised in total over 3000 entrepreneurs on a variety of decisions, they allowed us to compare the importance of 12 different cognitive biases and analyze whether their importance can change across five decision domains for which entrepreneurs seek advice of accountants: strategy, regulatory compliance, human resources, IT, and succession. Results from our analysis showed that for most of these biases, the importance differs significantly across decision domains. This indicates that considering the decision domain is important when studying these biases. In addition, our analysis allowed us to compare the 12 different biases to each other. In doing so, we provide some insight into which of these 12 biases are most important, both in general, as well as for each of the individual decision domains. In line with our other findings, this analysis showed that the biases that were considered to be the most important differed greatly across decision domains. We think this offers a small but valuable contribution, since it sheds a broader light on the issue whether some cognitive biases and decisions might be over-emphasized or under-emphasized and thus might be of help to researchers to determine which biases and decisions to focus on. A third contribution of our study comes from the willingness of our interviewees to share with us and with other accountants what approach they follow in situations that SME entrepreneurs fall victim to cognitive biases. We identified four debiasing approaches (warn, inform, intervene, and coach) SME accountants take to help SME entrepreneurs avoid or reduce biases. 5.2. Implications for Practice As more and more SME accountants extend their services from traditional bookkeeping towards advisory services and coaching, they are faced with both a great opportunity and a great challenge of adding value to SME entrepreneurs who struggle with their decisions. Those external accountants are in a unique position to provide added value by aiding the identification and prevention of cognitive biases. However, there are several challenges in doing so. Prior literature has identified many different cognitive biases, and these have often been studied in isolation. This makes it difficult for SME accountants to be informed of all these biases. Furthermore, it was unclear how important these biases are in these decision domains. Our study provides insights from various experienced SME accountants who have encountered these biases with SME entrepreneurs in practice. As such, our study provides other accountants with insight into how important these biases are across five decision domains. Furthermore, based on our analysis, we were able to identify which of these biases were considered to be the most important in each of the five domains. We consider such information to be valuable to practitioners since it allows them to focus on those biases, amongst the ones studied, that are most important given the decision at hand, and it allows them to better recognize them from the role that they can play in that decision domain. As such, accountants need not have to look out for 12 different cognitive biases in each decision, without knowing how important each of these may be. Adm. Sci. 2020,10, 89 19 of 23 Knowledge of which of these biases is the most important in the specific decision domain at hand can also provide an effective means to leverage the influence of the accountant and have a positive impact on the quality of the decisions that SME entrepreneurs make. The SME accountant can do so either by helping prevent these biases before they occur, or by counteracting them if an SME entrepreneur has fallen victim to them already. The insights generated from our interviews with SME accountants experienced in this role yielded suggestions for four different approaches that an SME accountant could adopt to achieve this result: by giving pre-emptive warnings, by giving the right information and asking the right questions, by challenging the SME entrepreneur when a bias occurs, or by mentoring and coaching the SME entrepreneur. 5.3. Limitations As is the case with all research studies, our work is subject to limitations. One limitation is that we restricted our study to five decision domains for which SME entrepreneurs seek the advice of their accountants. So, SME decisions that would not lend themselves for any involvement of the accountants, were excluded from our scope. We are not aware of relevant SME decisions that could be prone to biases and which are not included in our scope, other than the decision of choosing an accountant. At the same time, we cannot rule out that there may be other such decisions in which biases could play a role. Another limitation is that our study was not longitudinal and therefore we relied on the accountants’ recollection of biases in order to reconstruct how SME entrepreneurs made their decisions. We did not independently measure or verify the consequences of such biases, beyond the information that was provided by the interviewees. Therefore, we could not entirely eliminate the existence of cognitive biases from the end of the accountant in our data collection. However, the unique third-party position (Kahneman et al. 2011) that accountants have, offers them a very good stance to observe biases in the decisions that entrepreneurs make. On a related note, from the way we measure the importance of biases to entrepreneurial decisions, our results cannot distinguish between (1) how frequently a bias occurs as a percentage of the decisions that are taken, and (2) how strongly the bias affects the decisions. Both contribute to the importance that cognitive biases have in entrepreneurial decision making and serve the purpose of our study. A final limitation is that our study was restricted to 14 Dutch SME accountants who had advised in decisions by over 3000 entrepreneurs in the Netherlands over a period of two or three decades in total. Of course, some of our findings may have been influenced by the particularities of Dutch culture. Therefore, we are cautious to generalize our exploratory findings to a larger population nor can we make any claims for similarities with other countries. However, we do know that our list of decision domains for which SME entrepreneurs seek advice of the external accountant as well as our list of biases are derived from international literature and were confirmed by our Dutch interviewees. So, at least there is a certain level of similarity of the Dutch context to other countries. 5.4. Directions for Future Research Our study suggests several avenues for future research. First, it would be useful to conduct longitudinal studies and interpret the effects of cognitive biases over time for the various types of decisions that we identified. Some types of decisions (e.g., HR decisions) are taken more frequently than others (e.g., succession planning) and such differences could shape the pattern of chance and impact of biased decisions. Next, the results of our exploratory study could warrant further use of accountants as a source of information to examine entrepreneurial cognitive biases. Future research on this avenue could address the limitations of our study and expand to other countries, to a larger number of participants, and adopt a further refined instrument to measure and compare the importance of a series of cognitive biases on entrepreneurial decision making (in line with Keil et al. 2000). Adm. Sci. 2020,10, 89 20 of 23 In addition, there is a need to conduct research to test and verify the effectiveness of the actions that were suggested by the SME accountants to cope with these biases. Prior literature on the deaf effect, for example, suggests that the approach of giving warnings may only be successful under certain circumstances (Nuijten et al. 2016). Even though several of the approaches mentioned by the interviewees may have been successful for them, and are in line with literature on debiasing strategies, we believe it to be important to investigate such potential negative side-effects of the approaches that are described in this study. Finally, while extant research has focused on entrepreneurs and accountants separately and considered individual biases, we believe that more work is needed that takes a holistic approach on these biases, the entrepreneurs, their accountants, and their relationships. We encourage other scholars to further develop our understanding of this important field. Author Contributions: Conceptualization, A.R. and A.N.; methodology, K.W., A.R., A.N. and N.B.; software, K.W. and A.N.; validation, N.B. and A.N.; formal analysis, A.N. and N.B.; investigation, K.W. and A.N.; resources, A.R.; data curation, K.W. and A.N.; writing—original draft preparation, A.N. and N.B.; writing—review and editing, A.R. and K.W.; visualization, A.R..; supervision, A.R. and A.N.; project administration, A.R. All authors have read and agreed to the published version of the manuscript. Funding: This research received no external funding. Conflicts of Interest: The authors declare no conflict of interest. References Abatecola, Gianpaolo, Andrea Caputo, and Matteo Cristofaro. 2018. Reviewing cognitive distortions in managerial decision making. Journal of Management Development 37: 409–24. [CrossRef] Barbosa, Saulo D., and Alain Fayolle. 2007. Where is the risk? Availability, anchoring, and framing effects on entrepreneurial risk taking. 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