Decision Making and Sound Business Decision
Q: 1. Insurance companies in the state of Florida earned record profits in 2006, suggesting that Nationwide’s decision to cancel policies in light of the calm hurricane seasons (in Florida) in 2005-07 may have cost the company potential revenue and customer goodwill. Do you think Rommel’s quote about making a ‘sound business decision’ reveals any perceptual or decision-making biases? Why or Why not? A: Jeff Rommel’s quote about making a ‘sound business decision’ reveals two main perceptual or decision-making biases. The first decision-making bias is overconfidence bias.
The overconfidence bias means that the tendency to overestimate the probability that one’s judgment in arriving at a decision is correct. In Rommel’s decision, it is too confident for Nationwide to think that they have the ability to make the good decision. However, it did not think about some hidden cost like the reputation among the customers. Although it may not lose money in a short period, it will lose large amount of customers and the benefits of the company will decrease gradually. The second decision-making bias is anchoring bias.
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The anchoring bias means that a tendency to fixate on initial information, from which one then fails to adequately adjust for subsequent information. In Rommel’s decision, Nationwide did not take any other concept into consideration. It only made decisions by itself as soon as possible and did not think about subsequent information. Q: 2. Review the section on common biases and errors in decision making. For companies such as Nationwide, American Airlines and JetBlue that must respond to natural events, which biases and errors are relevant and why?
A: There are two main biases relevant to Nationwide. The first bias is overconfidence bias. Nationwide is too confident to make the decision correctly by itself. However, it did not think about the hidden cost like the reputation. The second bias is anchoring bias. Nationwide made decision as soon as they accepted the information and it did not take the subsequent information into consideration. The bias relevant to American Airline is overconfidence bias. It is to confident for it to think that they have the ability to make the decision correctly.
However, American Airline simplified the decisions. It only consider that the snowstorms are easier to handle because they are more predictable. The bias relevant to JetBlue is confirmation bias. The confirmation bias means that the tendency to seek out information that reaffirms past choices and to discount information that contradicts past judgments. After the problems appearing, JetBlue did not think about the reason, but only try to provide an explantation for the false instead. Q: 3.
In each of the three cases discussed here, which organizational constraints were factors in the decisions made? A: The main organizational constraint affecting Nationwide is reward system. Because the reward system, the decision-makers are willing to make decisions that favored by the organization. They will pay more attention to the benefit of organization and do not take other consequences into consideration. The main organizational constraint affecting American Airlines is historical precedents. Choices made today are largely a result of choices made over the years.
According to the past event, the decision-makers believe that the snowstorms are more easier to handle because they are more predictable. The main organizational constraint affecting JetBlue is formal regulations. Organizational rules and polices can limit the alternative choices of decision makers. Similarly, if there is no explicit rule, the decision-makers will not actively make decisions when the emergency happens. Q: 4. How do you think people like Rommel, Burgin and Neeleman factor ethics into their decisions? Do you think the welfare of policy owners and passengers enters into their decisions?