Systematic versus Non-systematic Error (aka Bias versus Noise)

Accounting estimates such as environmental clean-up costs, the allowance for bad debts, and the liability reserve for warranties are subject to different kinds of misstatements. They can be misstated due to systematic error (bias), due to non-systematic error (noise) or to some combination of both. To illustrate what we mean by systematic and non-systematic judgment error, please consider the following example.

Consider two scales, Scale 1 and Scale 2, that you could use to measure your weight.

Scale 1 always has systematic error, but never has non-systematic error. Scale 1 systematically weighs people as 5 pounds less than their true weight. It shows a reading of 175 pounds for persons who actually weigh 180, a reading of 220 for persons who actually weigh 225, and so on. As a result, since you know about Scale 1's systematic error, you could determine your true weight after just one measurement by adding 5 pounds to its reading. Of course, in the real-world one often does not know what a scale's systematic error is, but one often can estimate it.

Scale 2 never has systematic error, but is subject to non-systematic error. On average, it accurately measures weight, but its measurements randomly fluctuate by as much as 3 pounds on either side of a person's true weight. So, a person who actually weighs 180 could step on Scale 2 five times and receive readings of 183, 178, 180, 177, 182. As a result, even if you knew about Scale 2's non-systematic error, you could not determine your true weight after one measurement. You could, however, measure yourself on Scale 2 several times and the expected average reading would converge to your true weight.

Question:

A scale that randomly adds or subtracts up to 3 pounds to one's true weight exhibits _____________.

a. non-systematic error

b. bias

c .systematic error

d. Slope