Beating the base-rate fallacy: an experimental approach on the effectiveness of different information presentation formats

Abstract

Cognitive biases such as the base-rate fallacy are well known in theory, but until recently there exists only limited research how to cope with those biases in managerial decision-making. Hence, the aim of our study is to examine how management accountants should prepare information in order to reduce the phenomenon of base-rate neglect in probability judgments to guide rational managerial decision-making. To address this research question, we use an experimental design. Empirical evidence suggests that a visual-based information format, especially in comparison to a tabular representation, significantly reduces the fallacy of neglecting base-rates. In addition, we integrate user’s cognitive style and other personal characteristics as possible factors influencing the base-rate fallacy. Underlying mechanism and individual differences are discussed. Based on our findings, we offer advice to management accountants and guidance for future research directions.