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Review section on common bias and errors in decision making
Course:- Other Subject
Reference No.:- EM131536849




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Natural Disaster and Decision

Jeff Rommel's introduction to Florida could be described as trial by hurricane. Rommel took over Florida operations for Nationwide Insurance in 2004. Over a 2-month period that year, Florida experienced its worst hurricane season in history-four major hurricanes (Charley, Frances, Ivan, and Jeanne) slammed the state, causing an estimated $40 billion in damage. In the hurricanes' wake, Nationwide received more than 119,000 claims, collectively worth $850 million.

Although dealing with those claims was difficult, even more difficult was Rommel's later decision to cancel approximately 40,000 homeowners' policies. Nationwide received a huge amount of media attention as a result, almost all negative. In reflecting on the decision, Rommel said, "Pulling out was a sound business decision. Was it good for the individual customer? No, I can't say it was. But the rationale was sound."

Hurricanes aren't the only weapons in nature's arsenal, and the insurance industry is hardly the only industry affected by nature. Consider the airline industry. American Airlines has 80,000 employees, 4 of whom make decisions to cancel flights. One of them is Danny Burgin. When a weather system approaches, Burgin needs to consider a host of factors in deciding which flights to cancel and how to reroute affected passengers. He argues that of two major weather factors, winter snowstorms and summer thunderstorms, snowstorms are easier to handle because they are more predictable.

Don't tell that to JetBlue, however. On February 14, 2007, JetBlue was unprepared for a snowstorm that hit the East Coast. Due to the lack of planning, JetBlue held hundreds of passengers on its planes at JFK, in some cases for as long as 10 hours (with bathrooms closed!). To the stranded travelers, JetBlue's tepid offer of a refund was just as outrageous. For a carrier that prided itself on customer service and had regularly been rated the top US airline in customer satisfaction, it was a public relations disaster. Linda Hirneise, an analyst at J.D. Power, said, "It did not appear JetBlue had a plan." In defending the airline, JetBlue's founder and then-CEO, David Neeleman, said, "Is our good will gone? No, it isn't. We fly 30 million people a year. Ten thousand were affected by this." In responding to another interviewer, he said, "You're overdoing it. Delta screwed people for two days, and we did it for three and a half, okay? So go ask Delta what they did about it. Why don't you grill them?" Eventually, though, Neeleman himself was affected by it, and he stepped down.

Based on the above reading and learning from your assigned readings, respond to the following questions:

  • Insurance companies in the state of Florida earned record profits in 2006, suggesting in light of the calm hurricane seasons (in Florida) in 2005-2007 that Nationwide's decision to cancel policies 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?
  • 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?
  • In each of the three cases discussed here, which organizational constraints were factors in the decisions made?
  • 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 enter into their decisions?



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