ABSTRACT
Corporate decision makers who try to satisfy both safety and efficiency often face a dilemma. Safety encourages caution. In the language of signal detection analysis, safety tolerates a false alarm but deplores a miss. In contrast, efficiency discourages false alarms and tolerates a miss. Depending upon how the states of nature unfold, the decision maker who chooses the safe option may incur the wrath of a corporate incentive system that is quicker to reward efficiency than safely. Alternatively, the decision maker who chooses the efficient option may compromise safety and incur huge losses. This paper presents a case study that illustrates this dilemma. The decision makers were dispatchers for a major U.S. commercial airline. Their dilemma, to disrupt or continue normal operations, was triggered by severe weather bearing down on a hub airport. The paper presents a series of sensitivity analyses, using a traditional decision tree and Monte Carlo methods, that present a rational approach for resolving dilemmas posed by conflicting incentives. Adoption of this approach might save the industry millions but would require a wholesale change in corporate philosophy. This paper advocates incentive structures that place greater value on the process of decision making than in their largely uncontrollable outcomes.
