Decision Making and Sound Business Decision

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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. 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...
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