Preventive Choices: Organizations' Heuristics, Decision Processes and Catastrophic Risks

PREVENTIVE CHOICES: ORGANIZATIONS' HEURISTICS, DECISIONPROCESSES AND CATASTROPHIC RISKS*

JACQUELINE R. MESZAROS

University of Washington, Bothell

ABSTRACT

Organizational decision processes and criteria for making choices about reducingthe chances of catastrophic accidents are examined in six case studies of largechemical ®rms. The processes and heuristics observed are not consistent with thecompensatory decision rules presumed by strict liability laws. They are consistentwith satis®cing, ambiguity management, and some aspects of threat-rigiditybehaviours observed in other arenas of organization studies. They are also consis-tent with psychological ®ndings about how individuals make decisions about low-probability catastrophe risks. The heuristics may derive in part from anticipatedaccountability to outsiders and higher managers. They may lead to `too much'attention to some catastrophe risks, `too little' to others.

INTRODUCTION

A number of organization theorists have observed that imminent crisis, decline orperceived threat a�ect organizational behaviour. Several have explored the`threat-rigidity' response sometimes observed when ®rms face impending threats(D'Aunno and Sutton, 1992; Gladstein and Reilly, 1985; Staw et al., 1981) oronce a physical or ®nancial crisis has begun (D'Aveni, 1989; Turner, 1976).Others have found that ®rms exhibit higher levels of risk when their performancehas failed to meet expectations (Bowman, 1980, 1982; Bromiley, 1991; Feigen-baum and Thomas, 1988; Wiseman and Bromiley, 1991). All these studies focuson situations in which the probability of a bad outcome is relatively high, that is, athreat is imminent.Another important category of organizational behaviour is behaviour aimed at

preventing threats from growing imminent in the ®rst place (Weick, 1988).Prescriptive work on crisis management stresses that ex ante prevention is at least asimportant as ex post responses (Mitro� et al., 1987). Descriptive studies haveexplored how structural and operational conditions a�ect the probabilities ofcatastrophes. Several have identi®ed traits that set `high reliability' organizations inhazardous industries apart from others (Bierly and Spender, 1995; Roberts et al.,

Journal of Management Studies 36:7 December 19990022-2380

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Address for reprints: Jacqueline R. Meszaros, University of Washington, Bothell, 22011 26th Avenue,SE, Bothell, WA 98021, USA.

1994; Roberts and Libuser, 1993). Perrow (1984) has identi®ed the converse:conditions that may predispose ®rms in hazardous industries to major accidents.Retrospective case studies of the space shuttle Challenger (Moorhead et al., 1991;Starbuck and Milliken, 1988), Bhopal (Shrivastava, 1987) and other disasters(Turner, 1976) have yielded lessons about how organizational processes canincrease the chances of a catastrophe. As yet, however, there have been fewdescriptive studies of ex ante decisions aimed at reducing rare but potentiallycatastrophic risks. Two exceptions are Bowman and Kunreuther's (1988) study ofhow a chemical ®rm's strategic decisions were a�ected by the Bhopal accident andFerry and Kydd's (1992) study of ®rms' e�orts to prevent catastrophic computervirus infestations.In most industries, at most times, the probability of a catastrophe occurring is

quite low and the estimates of the probability of occurrence for such rare eventsare inherently ambiguous (Kunreuther and Meszaros, 1997). How such risks areframed or enacted in a ®rm is a crucial question as this will determine which risksbecome issues and which do not. Research has yielded con¯icting results withregard to whether managers will pay too little or too much attention tocatastrophe risks with low, ambiguous probabilities of occurrence. March andShapira (1987) noted, in a set of interviews with practising managers, that `possibleoutcomes with extremely low probabilities seem to be ignored, regardless of theirpotential signi®cance'. Similarly, Dutton and Webster (1988) found that whenuncertainty is high, managers are less likely to consider an issue important. On theother hand, several studies suggest that managers may overweight low-probability,high-consequence (Lp-HC) risks. In a review of studies of decision making aboutlosses, Laughunn et al. (1980) found that managers will refuse even to considerany project that holds some prospect for ruining their ®rms, no matter how lowthe probability of ruin. Economists have found that ®rms sometimes rely on`safety-®rst constraints' which set survival as an organization's primary objective,rather than expected pro®ts (Stone, 1973a, 1973b; Roy, 1952). Consistent withthese managerial and organizational results, psychological studies of individualdecision-making processes indicate that people in general overweight low probabil-ities (Kahneman and Tversky, 1979), particularly when the low probabilities areassociated with vividly frightening events (Johnson et al., 1993; Lichtenstein et al.,1978; Viscusi et al., 1987). Thus, some results suggest that managers will tend tounderemphasize low-probability catastrophic risks while others suggest that theywill tend to overemphasize them.There are also open questions about how Lp-HC risks are or ought to be

resolved. Society has adopted strict liability rules for industrial safety. These hold a®rm ®nancially responsible for the e�ects of accidents, regardless of whether therehas been negligence or not. The intention of strict liability is to cause ®rms tointernalize all costs of all accidents so that when managers anticipate cost±bene®ttrade-o�s they will make the safety decisions that yield greatest safety and bene®tto the entire community (Landes and Posner, 1987; Shavell, 1980). On the otherhand, organization theorists have repeatedly found that organizational decisionsoften do not follow systematic, economically rational decision processes (Cohen etal., 1972; Simon, 1955), which suggests that the intent of strict liability may not beachieved.The study reported here builds a grounded theory (Glaser and Strauss, 1967) of

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JACQUELINE R. MESZAROS978

business-related decisions intended to reduce the chances of catastrophic accidentsbased on six case studies in six di�erent chemical ®rms. The cases explore theorganizational processes through which the managers in these ®rms determinedwhich risks would be scrutinized and which would be mitigated. They examinehow issues related to Lp-HC risks are framed or enacted; the steps followed in thedecision processes; and the decision criteria and heuristics used.

METHOD

Grounded, Substantive Theory DevelopmentThe procedure for constructing the cases was based on Glaser and Strauss' (1967)guidelines for building substantive grounded theory through the constant compara-tive method (see also Glaser, 1976; Strauss, 1988). Substantive theories are `middlerange' theories ± theories that identify and describe important categories ofphenomena in order to enable prediction and explanation and improve practice.Substantive grounded theory is constructed by examining multiple similar cases inorder to identify basic theoretical categories and their properties. The methodyields an understanding that falls in the middle between the rich detail of one-caseethnographies and the conceptual breadth of formal theory.The constant comparative method is a process of continuous hypothesis-

creation, re®nement and testing (Browning et al., 1995). First, similar incidents(e.g. decision processes) falling into an initial theory category (e.g. Lp-HC risk-prevention) are identi®ed, compared and coded. Coding categories are progres-sively elaborated and extended to encompass incidents as they are assembled.Related and contrasting incidents that might extend, elaborate or discon®rm theemerging categories are actively sought. The elaboration process continues untilno new categories, major variations or inconsistencies are being found. At thispoint, the substantive theory is considered stable and saturated. Thus, multiplecases are included not to imply statistical generalizability, but to ensure saturation.Finally, underlying uniformities are identi®ed and distilled into a smaller set ofhigher level concepts that capture the patterns found.

SAMPLE

Fifteen major chemical ®rms with headquarters or major operations in the vicinity ofPhiladelphia were asked to provide cases. The six described here were the ®rst sixwho agreed. The sample size is comparable to other theory-building studies oforganizational decision making (cf. Eisenhardt, 1989; Janis, 1982; Spender, 1989).The ®rms range in size from annual sales of approximately $1.5 billion to $40 billion.All are diversi®ed corporations structured as divisionalized international or multi-national product-market or manufacturing bureaucracies. All derive the majorityof their revenue from organic or inorganic chemical businesses. All are membersof the Chemical Manufacturers' Association and other major industry associations.The ®rms' corporate safety directors were asked to assemble a team to provide a

case describing a situation their ®rm had faced that ®tted the following pro®le:

Your ®rm became aware that one of its existing or newly planned facilitiesmight pose a risk of serious acute injury to members of the local community.

PREVENTIVE CHOICES 979


What were the decision criteria and decision processes used to evaluate andmanage the risk and how were they arrived at? Who participated in thisdecision process? What was their perspective? When and how did they contri-bute to the ®nal decision? How were any impasses resolved?

Other than the instructions to consult the original participants and to describe thedecision criteria and processes, the safety managers were not given detailedinstructions as to what to record, how to handle con¯icting accounts, or what kindof themes to emphasize.The cases chosen were all quite similar in the nature and scope of decision

addressed. All involved extremely unlikely risks (i.e. estimated to be in the range ofone chance in l05 or l06 per year) with the potential for fatalities outside plantgates. This level of probability of o�-site loss of life is considered the highest accep-table range by many information systems professionals (Greenberg and Cramer,1991).

Case ElicitationAs mentioned above, case presentations were organized by company safetymanagers in consultation with operations managers, business managers andengineers who had participated in the decision described. The safety managers,accompanied by one or two of the others who helped prepare the case, presented itand participated as other companies' cases were presented. The presence of multiplecompany representatives allowed memory gaps and con¯icts to be explored.Each case presentation and discussion took approximately two hours. Cases

were delivered in two six-hour sessions several months apart. In the periodfollowing the ®rst meeting, initial theory categories and follow-up questions forparticipants were developed. In addition, after the two case meetings, one six-hoursummary meeting was held to allow participants and the researcher to review,expand upon and explore commonalities and contrasts across cases. Theatmosphere at all the meetings was cordial and lively. A number of fears, pastcon¯icts and lessons were shared.The cases were presented to a `round-table' panel composed of the members of

the other case teams plus representatives from other chemical ®rms, insurance®rms, academic institutions and government regulatory bodies. The round-table ofexperts served as both a corrective device and theory-development mechanism.Panel members were instructed to elicit further information and detail, comparetheir own experiences, and identify and raise questions about gaps, vagaries andinconsistencies in the cases. The role of the primary researcher was to distilemergent themes, commonalities and contrasts. These themes were not divulgedto the round-table participants, but questions related to them were asked.Finally, follow-up in-person or telephone interviews were conducted with the

case leaders. These interviews were designed to allow them to express concernsand reservations about the process and content of the round-tables. They werealso designed to explore how the cases had been chosen and how these casescompared with other safety-investment decisions these ®rms had faced.

Round-table FormatThe round-table format amounts to a form of shared interview, a method thatallows for immediate and direct highlighting of points of agreement and disagree-



ment across participants (Morgan, 1988). Incidents and categories can be identi-®ed, tested and elaborated as participants respond to questions and challengesfrom interviewers with di�erent points of view, experiences and cognitive frames(Morgan, 1988). In a sense, shared interviews are to individual interviews whatfocus groups are to one-on-one interviews. Focus group methods have beensingled out as particularly appropriate to the development of grounded theory asthey hold advantages for developing concepts, hypotheses and theoretical proposi-tions from those who are directly involved with the phenomenon being studied(Poole and McPhee, 1985).All methods have ¯aws, of course. One concern with the shared-interview

format is that conformity, demand or social-desirability e�ects might distort®ndings, yielding an impression of more similarity than really exists (Crowne andMarlow, 1964; Janis, 1982). These concerns cannot be entirely eliminated.However, several correctives were adopted to minimize false conformity. First, theinitial three cases were developed independently of each other and before anyround-tables were held. Thus, the initial descriptions were not contaminated bygroup discussion. The second set of cases was also written before that round-tableand so did not contaminate each other, though the authors had been present atthe ®rst meeting. Third, during discussions, the researcher and other participantspressed for contrasts to be revealed and highlighted. This led to revelation of newinformation without an opportunity for the representatives of each company to co-ordinate responses. There was no evidence that representatives were trying to co-ordinate or distort their responses in order to agree or conform. Nor were anyinconsistencies in responses across meetings detected. Finally, several managersdiscussed instances in which less-than-societally-desirable positions were advocatedwithin their ®rms. While none of those positions won the day in these cases, thecompany representatives were comfortable admitting to their existence in their®rms and their role in the decision process.There was also concern that the presence of the audience might cause ®rms to

hide information or bias their choice of cases. This bias may have been no worsethan it would have been if private interviews had been conducted. Most companyrepresentatives indicated in the follow-up telephone interviews that they probablywould have chosen the same cases even if they had been asked to share them onlywith a small group of academics who would be publishing the results.

Case Selection and ControlCase studies based on retrospective reporting share several weaknesses andstrengths. Feasibility is a strength. Since complex organizational decisions aremade over long periods of time and involve unpredictable, unplanned interactionsamong multiple actors, they are di�cult to observe ®rst hand and in detail(Mintzberg et al., 1976). Potential distortions are a weakness. Mintzberg et al.point out that process reconstruction methods are vulnerable to individual distor-tions, memory failures and systematic distortions. The round-table discussionswere designed to include opportunities for individual distortions and omissions tobe identi®ed and corrected, since several members of each ®rm participated inwriting, presenting and discussing each case.With regard to systematic distortions, the issues are less clear. Mintzberg et al.

(1976) reported that they did not suspect any systematic distortion in the 25 cases



their students examined, though they did not describe how the ®rms in their studychose which cases to share with them. It is not unreasonable, however, to expectthat the cases that companies choose to share with researchers may be systemati-cally biased toward stories that are easy to tell and/or not damaging to the ®rms'or the managers' reputations. During the follow-up interviews respondentsindicated that they had chosen to present cases with outcomes that were notcontroversial and that would not be detrimental to company interests if a lawsuitshould ever occur.All the cases ended in actions that reduced catastrophe potential, a desirable

choice in terms of social responsibility. During the follow-up interviews, caseauthors were asked to discuss cases with less societally desirable outcomes. Severalcould not think of an example. Three did o�er examples. All three of those caseswere situations in which their ®rm had closed a business because the risk was nolonger considered acceptable. No managers ever described a speci®c case in whichtheir ®rm or some other ®rm had decided to continue to live with a catastropherisk, though several managers indicated that they believe such situations exist inthe industry. Thus, this sample of cases is apparently biased toward decisions withsocietally desirable outcomes. It can reveal how some ex ante preventive decisionsare processed, but not all.

FINDINGS

The cases are brie¯y summarized in table I. The risk-reducing actions described inthe cases were all `voluntary' or `proactive' in the sense that the preventive actionsbeing taken were not required by regulation. The companies' choices were in¯u-enced by anticipated competitive, legal and reputational e�ects and by managers'and others' risk perceptions and preferences, but not by mandate.Five of the six cases began when some risk a ®rm had been managing became

identi®ed as more worrisome or urgent than previously thought; only one beganwith a newly recognized risk (see table II).Five of the six cases (Companies A±E) resulted from voluntary reassessments of

chemical hazards following the 1984 catastrophe at Bhopal (see table I). In ®ve ofthe six cases (Companies A and C±F), the ®rms focused on potential harm tocivilians outside plant gates as a potentially ruinous risk. The remaining company(Company B) concerned a material that presented a risk to workers.

The Decision ProcessesA summary of the common pattern that emerged in the cases is o�ered in ®gure 1.The pattern was as follows:

. Survivability heuristic. Managers chose to scrutinize a hazard if they wereconcerned that a worst-case accident with that hazard could ruin their ®rm.

. Alternative development and analysis. Alternatives for reducing or removing thepotentially ruinous risks were identi®ed and analysed.

. Upward appeal. Preferences and judgements were sought from higher levelmanagers.

. A�ordability heuristic. The decision as to whether or not to adopt a preferredmitigation measure was assessed in terms of a�ordability.



. Mitigation or shutdown. If the e�ective measure was a�ordable, it was adopted. Ifit was not a�ordable, in these cases, the ®rm shut down the hazardous activity.

Because this set of cases involved only instances in which risks were consideredpotentially ruinous, mitigation measures potentially e�ective and a�ordable, and

Table I. Summary of case traits

Company and structure Primarybusiness

Initiating event andnature of hazard

Alternatives explored Decision

AProduct-market structure

Diversi®edchemicals

Post-Bhopalreassessment.Newly purchasedplant with largecommunity nearby.

± Re-engineer± Shutdown

Re-engineer

BProduct-marketstructure

Specialtychemicals

Post-Bhopalreassessment.Plant workersencroaching* onhazardousoperation.

± Improveoperations

± Re-engineer inplace

± Relocate andrebuild

± Shutdown

Shutdown

CManufacturingstructure


Post-Bhopalreassessment.Communityencroaching* onpipeline.

± Replace sections± Relocate sections± Shutdown;produceelsewhere

Shutdown;produceelsewhere

DManufacturingstructure


Post-Bhopalreassessment.Storage tanks notup to industrystandards.

± Tank redesign± Re-engineer toeliminate storage

Re-engineer

EProduct-marketstructure

Specialtychemicals

Post-Bhopalreassessment.Communityencroaching* onpipeline.

± Refurbish± Refurbish andupdate

± Shutdown;produceelsewhere

Shutdown;produceelsewhere

FManufacturingstructure

Petro-chemicals

Non-injuriousincident.Chemical presentshazard tocommunity.

± Redesign innertank

± Redesign outertank

Redesignouter tank

*Encroaching means nearby populations are growing larger, increasing the numbers of people at risk.



top management amenable, they do not reveal what occurs when these tests arefailed. This is re¯ected in ®gure 1 by question marks at the nodes these cases didnot address. The question mark associated with the `shutdown' option re¯ects thefact that other options are possible (e.g. continuing to operate), but that in thesecases this was the only one chosen.

The Survivability HeuristicBefore any decision is made, it ®rst must be determined that a decision is needed.All of the companies in the study work with many hazardous materials andmanage many risks. In all of the ®rms a form of `survivability heuristic' determinedwhich risks deserved attention: any risk that could lead to the demise of the entirecorporation was subjected to reassessment. The mechanisms mentioned by whichaccidents could lead to company ruin were extreme reputation losses, liabilityclaims and actions by regulators. Table III outlines some of the survivabilityconcerns expressed.The survivability heuristic operated as an outcome-based threshold test. A

hazard either presented a threat of ruin or it did not. Beyond this, all probabilitieswere essentially treated as equal; potentially ruinous risks were treated as equallyurgent, regardless of variations in estimated probabilities.Round-table discussions included other indications that outcomes, not probabil-

ities, were what mattered to these decisions. None of the managers who had parti-cipated in post-Bhopal reassessment cases (Companies A±E) felt that anything newabout accident-prevention or the behaviour of chemicals had been learned as aresult of the Bhopal accident. Their estimates of the probabilities of accidents were

Table II. History of hazard in question

Company Issuepreviouslyrecognized?

A Risk policies changed after Bhopal. This risk met old guidelines butnot the new ones.

Yes

B Previous corporate audits had identi®ed this risk but allowed it. AfterBhopal, the company would not tolerate the risk at all.

Yes

C Before Bhopal, analyses had identi®ed this risk and led to several risk-reducing investments. After Bhopal, the company would not toleratethe risk at all.

Yes

D Risk had been previously assessed and mitigated. Reassessmentrevealed that the ®rm's practices were not more risky than previouslythought, but that they did not match new, prevailing industrypractices. Anticipated extreme liability if an accident occurred.

Yes

E Bhopal triggered a reassessment. The reassessment led to theconviction that the risks to employees exceeded corporate guidelinesin place since before Bhopal.

Yes

F Chemical found to behave di�erently than previously expected.Presented previously unrecognized hazard to community.

No



not changed by that event. Their estimates of the potential consequences of anaccident and, in particular, of the penalties society would impose, however, hadrisen drastically. Chemical industry managers expected the liability, regulatory andreputational penalties of an accident would be much higher after Bhopal. In theremaining ®rm, Company F, issue-surfacing did not result from a post-Bhopalreassessment. Instead, an employee observed a material behaving di�erently thanexpected and realized that the material posed a greater hazard to the surroundingcommunity than had previously been supposed. Again, the ®rm's estimate of theprobability of a release did not change, but its estimate of potential consequencesdid. In all six cases, then, it was a change in expected losses ± losses so large thatthey could ruin the corporation ± and not a change in estimated probabilities, thatled decision makers to treat a given hazard as an issue demanding assessment andpotential mitigation.

Figure 1. Outline of decision processes



Alternative Development and AnalysisIn each ®rm, an interdisciplinary team analysed the worrisome risks, exploredmitigation alternatives and made choices (see table IV). In all the ®rms, theseteams conducted analyses of the status quo arrangements and various mitigationalternatives in terms of worst-case scenarios.In three ®rms, both probabilities and consequences of worst-case accidents

before and after mitigation were analysed by means of quantitative risk assessment(QRA) techniques (Center for Chemical Process Safety, 1995). In the other three,consequences only, without probabilities, were estimated using a technique calledconsequence analysis (CA) (Center for Chemical Process Safety, 1995) (see tableIV). According to case participants, these are the same analysis processes used inthese ®rms for more normal risk assessments (e.g. when designing new plants orconducting periodic audits).

Upward AppealHaving conducted analyses of mitigation options, most of the teams reachedconsensus about which alternative should be adopted, though the teams in two®rms could not reach consensus. All of these teams, whether they had reachedconsensus or not, next sought the judgement of a high-ranking manager aboutmitigation preferences. In one instance, the appeal involved asking the manager tojoin the decision team. In three cases the appeal involved a formal consultation(e.g. asking whether a particular alternative ®tted the ®rm's preferences) but notdecision-sharing. In the remaining two ®rms it consisted of informal consultation(e.g. probing a manager's opinions in a casual conversation). In some cases, theappeal occurred only when the analyses were complete; in others it occurred whileanalysis of alternatives was still underway. Still, in all of the cases, it occurred.When the higher manager's preferences were di�erent from the team's moststrongly preferred choice (which happened in Companies B and F), the highermanager's preferences took precedence.

Table III. Examples of liability- and reputation-based survivability reasoning

Company

A `Maintaining reputation in order to maintain the ability to do business. This iswhat [the corporation] is really concerned with.'

B `[The company] got worried about the liability, that it would be horrendousbecause we could not get the [probability] numbers down to acceptable levels.'

C Àfter Bhopal we felt we [the corporation] would not be able to operate any longerif we had a leak in something like that.'

D `We learned that the equipment we were using was not considered best practice inthe industry any longer. Liability would be huge if that was raised in a court oflaw.'

E `[We] expected that any incident would risk the whole company in liability.'

F `Lots of people lived near the plant. There could have been multiple fatalities ifthere was a complete tank failure. We would be out of business.'



Although these teams were using the best risk-assessment techniques accepted intheir ®rms, and although all the teams were empowered to make this decision fortheir ®rms, they were not comfortable relying solely on the results of their analysesand discussions (see table V). The rationales for appeals upward emphasize a kindof `disconnect' between analysis and choice. The teams were not comfortable thattheir preferences and judgements were consonant with their ®rms' risk preferencesand/or with the preferences and judgements of those in the ®rm to whom theywere accountable in this emerging, ambiguous, high-consequence arena.

The A�ordability HeuristicOnce preferred mitigation options were identi®ed, a form of threshold-basedheuristic was used to determine which options would be adopted. Table VIsummarizes some of the comments pertinent to these choices. In ®ve of the six®rms (all except company E, which found an alternative that actually decreasedcosts while increasing safety) this ®nal choice was described as hinging on whetherthe business unit could make the investment and remain pro®table. Thus, it hasbeen labelled the a�ordability heuristic.As one manager put it, Às long as you're betting the company, the probability

doesn't matter. You'll do anything economically feasible.' In the cases describedhere, èconomically feasible' e�ectively was operationalized in terms of unit-levelpro®tability constraints. Round-table discussions revealed that several companies

Table IV. Participants and forms of analysis

Company Participants Form of analysis Consensus?

A Plant management Quantitative risk analysis YesCorporate safetyCorporate engineering

B Plant management Quantitative risk analysis NoBusiness unit managementCorporate safetyCorporate engineering

C Plant management Quantitative risk analysis YesBusiness unit managementCorporate safety

D Corporate operations Consequence analysis Yesmanagement

Plant managementPlant safety management

E Corporate Safety Consequence analysis NoBusiness unit managementPlant management

F Business regional management Consequence analysis YesCorporate engineeringPlant engineering and safety



(including companies that were present at the round-table but did not presentcases) used a rule of thumb that such investments would be made if they led a unitto be unpro®table for less than three years but not if the investment would yieldunpro®tability for a longer time than that.While the managers' discussions of potentially ruinous losses focused on

corporate-level survivability, their discussions of how to handle the threats theyfaced centred on business-unit (BU) resources. Only BU-level ®nancial numberswere ever mentioned.

DISCUSSION

The Economic Rationality of PreventionLegal and economic models for how ®rms ought to make safety-investmentdecisions presume a rational expectations framework. They anticipate that whenstrict liability is in force, as it is with regard to industrial accidents, a corporationwill increase care, prevention or protection up to the point where the expectedvalue of the care (i.e. the change in the probability of the loss (Dp) multiplied bythe size of the loss (L), i.e. Dp 6 L), exceeds the cost of the investment (Beard,1990; Landes and Posner, 1987; Shavell, 1980). Strict liability is designed toachieve two primary goals. First, it aims to ensure that the victims of harm arecompensated by encouraging producers to incorporate the cost of safety andliability into prices, thus spreading the costs of accidents across the population of

Table V. Importance of judgement

Company

A Ì've heard everyone, at one point or another, appeal to ``gut feel'', experientialjudgement. We've gone through a major process to develop quantitativeguidelines. We're deeply involved in QRA. But in the end, what does the numbermean? That's where gut feel kicks in again and you need to consult topmanagement and the most experienced people.'

B `We don't know what to do with these numbers, whether 10±4 or 10±5 [per year] issmall enough. I am an engineer and I have to think in terms of a physical process.I can't make sense of just numbers.'

C Ì view risk assessment as an emerging technology. It's one thing to use itinternally, quite another outside. It was exposure to the community ± not theanalysis ± that decided things. [Top management] was not willing to accept it, nomatter what the QRA said.'

D `We tend to be very decentralized. And we've now set risk criteria. We're evolvingin this direction. But our culture is too much based on experience to excludejudgement at the ®nal decision point. Judgement overrides analysis for us.'

E `We had clearly de®ned risk criteria, so the decision could have been made at alower level. But it wasn't.'

F `With lots of investments, the company is comfortable with quantitative analysis.But with lives at stake . . . the ``comfort index'' is di�erent. Intervention bysomeone upstairs is essential.'



people purchasing products in an economically sustainable way. Second, it aimsoptimally to deter injuries by imposing the incentives for precaution upon thosewho have the greatest capacity to improve safety, namely the producers. Whilethis theory rests on some strong assumptions (e.g. that altering company behaviourrather than consumer behaviour is always the best way to reduce product risk), ithas been widely accepted by both economists and courts as the most e�cientmeans to improve safety (Boyd, 1993).[1]

The choice heuristics used by the ®rms in these cases framed the decisionsituation; they constituted enactment or sense-making in an ambiguous Lp-HCcontext (Gioia and Chittipeddi, 1991; Weick, 1988) in which there is no univer-sally accepted method or standard for making choices. The enactments weresigni®cantly di�erent from the e�cient frameworks proposed in the law andeconomics literature. Deviation from apparent economic rationality is not, in itself,a surprise. Organization theorists have explored deviations from economic ration-ality at least since Simon's work on bounded rationality (Simon, 1955, 1956).What is interesting here are several patterns, consistent with other descriptivestudies of organizations and with behavioural decision theories, in the heuristicsand processes employed in lieu of rational expectations. The managers did notrely on ambiguous probability estimates. Instead, they used discontinuous,threshold-type decision rules (i.e. the survivability and a�ordability heuristics)rather than on compensatory, expected-value type (i.e. cost-bene®t type) decisionrules. These threshold rules are similar to those found in previous descriptivestudies of individual- and organization-level decisions about preventing Lp-HCevents (Bowman and Kunreuther, 1988; Ferry and Kidd, 1992; Kunreuther,1978) and with `safety-®rst' rules found in studies of ®rms facing potential survival

Table VI. Feasibility assessments

Company

A `The way we saw this was either spend the money or shut it down. We coulda�ord it, so we did it.'

B `We were not comfortable that remediation options 1 and 2 would make the risknegligible. We couldn't a�ord to relocate and rebuild. We decided we had to shutdown.'

C `We couldn't move the pipeline and remain pro®table, so we had to produce [theproduct] elsewhere. The customer didn't like it and we'd already invested a lot insafety on that line. But that was all we could do.'

D `The investment was not a threat to [the product's] pro®tability. If we weren't upto best practice and something went wrong, the liability could have been horrible.It was a no-brainer.'

E `Business e�ects were minimal because we saw that we could produce elsewhere.We had to accept a little less pro®t because the customer was not happy with thechange.'

F `The division [was reluctant] to make the investment, but corporate thought it wasnecessary. Initial cost estimates were within the division's budget.'



threats (Stone, 1973a, 1973b; Roy, 1952). They are also consistent withbehavioural decision studies that have found that both managers and lay peopletend to make decisions about Lp-HC risks in all-or-nothing terms (Laughunn etal., 1980; March and Shapira, 1987; Viscusi et al., 1987).The two main heuristics found in these cases focused on essentially the same

types of judgements: survivability was used to assess how urgent it was to deal witha particular risk; a�ordability was used to assess the feasibility of mitigating it.Judgements about urgency and feasibility have previously been found to determinewhat becomes a strategic issue in an organization (Dutton and Duncan, 1987).Notably, in the cases described here, urgency and feasibility were employed notonly to identify and categorize strategic issues, as has been observed in paststudies, but also were employed as choice criteria to resolve the issues. When anurgency (i.e. survivability) test and feasibility (i.e. a�ordability) test were passed, thedecision was not merely considered a strategic issue, it was essentially made.According to previous studies of organizations, the urgency of an issue is a

function of its threat to the survival of the `reigning dominant coalition' (Duttonand Duncan, 1987). The survivability heuristic ± `could an accident involving thishazard put us out of business?' ± is certainly pertinent to the survival of thedominant coalition. However, the probability of a bad outcome should also bepertinent. Since the chances that accidents would occur in these cases wereestimated to be quite low (i.e estimated between 10±5 and l0±6 per year by the®rms themselves) they were, in a probabilistic sense, not urgent at all. What mightaccount for the attention to such low-probability issues?Previous studies of decisions preceeding crises have found that probabilities are

important in organizational decisions about catastrophic risks. Starbuck andMilliken (1988) found that faulty assessments of probabilities were important inNASA's decision to launch the Challenger space shuttle. Shrivastava (1987) foundthey were important at Bhopal. The cases reported here illustrate that a di�erentcondition can occur: managers can focus so strongly on potential outcomes thatthey essentially treat probabilities as highly likely. In all of the ®rms, a non-probability-based survivability heuristic determined which risks became issues inthe ®rst place. In half the ®rms, probabilities were not estimated at all. Only conse-quence analyses were conducted. In the other half, quantitative risk assessmentswere conducted that included probability estimates. Even in these ®rms, though,the probability estimates were not strongly determinant of the decisions made.Instead, subsequent non-probability-based decision steps (i.e. the upward appealand a�ordability heuristic) determined how the issue would be resolved.

Commonalities across CasesIt is interesting that the ®rms had adopted similar decision criteria. Work onmimesis in organizations has suggested that imitating the actions of other organiza-tions can be an e�cient response to uncertainty (DiMaggio and Powell, 1983).The risks in these cases involved extreme uncertainty. In addition, imitationo�ered not only an e�cient path to a viable solution under uncertainty, but also ameans by which each ®rm could try to ensure that its performance would be noworse than that of its competitors (Abrahamson and Rosenkopf, 1993; Dixit andNalebu�, 1991). Opportunities to learn about each other's decision processes mayhave come through meetings of industry and professional organizations.



Another factor that may account for the adoption of similar threshold-basedheuristics has to do with anticipated accountability and social context. The socialcontingency model of judgement and choice suggests that decision makers antici-pate the decision criteria of those who will judge them and adopt decisionbehaviours that will be acceptable to those judges (Staw, 1980; Tetlock, 1992).Additionally, behavioural decision research suggests that under conditions ofambiguity decision makers anticipate how others will judge them and try to makedecisions so that their rationales will be acceptable to those judges if a badoutcome occurs (Curley et al., 1986). The managers in these cases indicated thataccountability considerations a�ected them. They focused on potential socialsanctions, such as anticipated liability and reputation losses if an accidentoccurred. They were concerned about their accountability to the general public.Public and legal debates after the Ford Pinto case suggest that a majority of the

public does not approve of the use of cost±bene®t decision rules when the costsmay include loss of human life (Kelman, 1994). Consistent with this, behaviouraleconomic research has found that individuals prefer avoidance rules instead ofcost-bene®t trade-o�s for risks that include potential serious damage to humanhealth or life (Viscusi et al., 1987). Thus, accountability e�ects would lead us toexpect companies to adopt threshold-based decision approaches similar to thosepreferred by the stakeholders who will be judging them.Many interesting issues as to how organizational heuristics emerge and how

sense-making becomes shared across organizations cannot be answered by thisstudy. Other methodologies could help triangulate the issues. For example, ethno-graphic case studies could provide richer descriptions of the forces and processesthat constitute sense-making and decison making about inherently ambiguous,frightening risks. They might help us better understand the role which each ofthese observed forces ± ambiguity avoidance, accountability e�ects and cognitivepredilections ± play in creating similar heuristics and judgements across an industry.

Further Coping with Uncertainty and Ambiguity: Upward AppealsIn spite of mandates to make decisions themselves, all of the teams reported thatthey appealed to the judgement of a higher ranking o�cial before making their®nal decisions. Organization theorists have posited three types of reasons whysubordinates voluntarily appeal upward. One is to increase their power by formingcoalitions with those who have more formal power or resources (Kipnis et al.,1980). A second is to di�use responsibility for ®nal choices by sharing it withhigher ranking managers (Ruchala et al., 1996). A third is to increase comfortlevels under di�cult conditions such as ambiguity (Eisenhardt, 1989).The appeals in ®ve of the six cases were purely consultative (Vroom and Yetton,

1973), with no technical information being shared. Thus, the degree to whichpower or resources was shared was minimal. Similarly, responsibility could nothave been signi®cantly di�used, especially in the cases where the consultation wasextremely informal.Both the nature of the consultations and the rationales o�ered in these cases for

seeking preference judgements from higher authorities seem most consistent withthe third explanation for upward appeals: increasing comfort in ambiguousdecision situations. The rationales centred around checking whether there was ®twith other managers' `gut feel' and risk preferences. Managers' reports indicated



that many of the teams were not comfortable that their analyses had led them toconclusions that ®tted with organizational preferences in this highly ambiguous,changing arena. Organizational policies institutionalizing standards and prefer-ences were either newly in place or not yet well formed. The teams elicitedjudgement from higher ranking managers in part to reduce their uncertaintyabout the ®rm's preferences and the relationship of their analytic results to others'`gut feel'.

Threat-RigidityPast studies have found that information-processing behaviours become lesscomprehensive when an organization is confronted with a threat. Analysesbecome less thorough and the number of participants is reduced (D'Aunno andSutton, 1992; Gladstein and Reilly, 1985; Staw et al., 1981). These cases did notconstitute a systematic test of these threat-rigidity hypotheses. However, they doallow some insight into information processing related to low-probability threats.The analyses of risks and mitigation options in these cases were quite thorough,

involving either an extensive consequence analysis or an even more comprehensivequantitative risk analysis. The number of participants involved in the analyses wasnot greatly restricted. On the other hand, at the stage where ®nal choices weremade, the ®rms adopted simple, threshold-based heuristics that were not cogni-tively complex. They could have more comprehensively ranked and prioritizedhazards and mitigation measures across business units based on the analyses theyhad already conducted. Instead, they relied on simple threshold rules for choice.Thus, at the choice stage, information processing was quite restricted and non-comprehensive.Stress has been hypothesized to be the mechanism that instigates restricted

information processing in threat-rigidity models (Cowen, 1952; Staw et al., 1981).The nature of these cases was that they involved unlikely threats. When a threat isnot likely, there is also little time pressure. Hence, two major sources of decision-making stress (i.e. likelihood and time pressure) were not present for these Lp risks,although another (i.e. vividly bad outcome) was. Some information processingsteps were simpli®ed while others were not. These cases thus suggest that someparts of a decision process may exhibit rigidity while others do not. To more fullyunderstand behaviour under threat, typologies of threat might distinguish amongsteps in the decision-making process. They might also distinguish among contribu-tors to stress such as low and high probabilities, small and large potential lossesand degrees of time pressure.

Some Concerns for PracticeFrom a societal point of view, it seems desirable that the ®rms take low-probability,high-consequence risks seriously. In these cases, managers attended to these risksand sought to eliminate them where possible. The heuristics, though, raise severalconcerns about whether managers will make the best possible risk-reductiondecisions, both from the point of view of their ®rms and of society as a whole. Forexample, the survivability heuristic may lead ®rms to attend too heavily to Lp-HCrisks when more lives might be saved by attending to more probable but lesscatastrophic risks. This was troublesome to some of the managers in this study tothe extent that they were aware of opportunities to use the same resources to save



more lives by investing in precautions against higher-probability but lesscatastrophic risks. As one safety manager stated, Ìn one instance our companyinvested $1 billion essentially to save 1 life per year. We could have saved morelives if we had invested that money elsewhere.'Relatedly, the BU-based a�ordability heuristic might lead to overinvestment by

units that are performing well, and underinvestment by units that are performingpoorly. Overinvestment may hurt a ®rm's competitiveness; underinvestment mightlead it to take too many risks.The appeals up the hierarchy made the personal judgements and risk tastes of

the consulted managers especially important to ®nal choices. In a sense, byconsulting upward, the teams forfeited some of their own authority. Instead ofhaving the decision made by an expert, interdisciplinary team informed by anextended process of deliberation, the decision was heavily in¯uenced by anoutsider to the process. If expert group processes yield better decisions in thesesorts of contexts, it will be important to make sure that the participants do notseek uncertainty-reduction from the wrong sources or in the wrong ways.

GeneralizabilitySafety-related choices can sometimes be specialized, functional decisions. Theyfall into the province of industrial safety experts, who pursue loss preventionby means of engineering, changing human practices and reducing hazards(Crowl and Louvar, 1990) within the con®nes of already determined sets ofbusinesses and products. However, the cases examined here, like manycatastrophe-avoidance decisions, involve business decisions rather than puresafety decisions. Following several highly visible crises ± such as Bhopal, theExxon Valdez oil spill and the Ford Pinto liability award ± the e�ects of otherlevels of business choices on safety issues, and vice versa, have grown moreevident. Safety decisions have come to command top-executive attention(Petersen, 1995). In order to avoid low-probability, high-consequence (Lp-HC)risks, companies have altered their research and development strategies (e.g.reduced contraceptive and vaccine research to avoid Lp-HC liability risks)(Asbury, 1985), abandoned certain categories of products (Huber, 1988) anddivested divisions (Ringleb and Wiggins, 1990). The decisions in these cases areof this sort. The decision makers included business generalists with broadresponsibility and top executives, not just sta� functionalists with technicalconcerns. The actions considered included exiting certain businesses, makinglarge investments and/or relocating. The ®ndings may therefore be relevant toa number of other Lp-HC ambiguous contexts with business implications, notjust process-safety issues.

CONCLUSIONS

A set of six case studies explored the heuristics and decision processes whichchemical manufacturers used when making major, business-related decisions aboutprevention of catastrophes. No multiple-site study of decisions about preventingunlikely catastrophic losses has previously been conducted.The research design includes some limitations. The cases present a limited set of



decisions from which to generalize. The selection of cases was biased; only caseswith societally desirable outcomes were presented. The sample was designed to behomogeneous, in consonance with methods for developing grounded theory. Theelicitation method may have promoted consensus, though controls were in placeto try to inhibit this tendency and a number of between-®rm variations wereobserved.The prevention issues were framed in terms of threats to survival. Attention to

worst-case outcomes, neglecting probabilities, guided the choice processes. Overall,decision processes were guided by assessments of urgency (i.e. survivability) andfeasibility (i.e. a�ordability). The survivability heuristic was linked to anticipatedaccountability to outside stakeholders. At the analysis stage, the ®rms assembledinterdisciplinary teams to conduct extensive technical analyses. To make ®nalchoices, however, they relied on simple, threshold-based heuristics and the appealsto the judgement of higher-ranking managers. Thus, the results are only partlyconsistent with past studies of threat-rigidity e�ects.Some past studies suggest that managers may pay too little attention to low-

probability, ambiguous risks (Dutton and Webster, 1988; March and Shapira,1987); while others suggest that they may pay too much (Kahneman and Tversky,1979; Laughunn et al., 1980). The decision processes used here are consistent withboth types of ®nding. Risks that fail an initial threshold test will receive noattention at all. Risks that pass those tests receive a great deal of attention in spiteof low estimated probabilities. The threshold tests are subjective.Previous ex post studies of decision making preceding catastrophes (Starbuck and

Milliken, 1988; Shrivastava, 1987) have found evidence that ®rms are sometimestoo complacent in the face of catastrophic risks. Other managerial studies indicatethat ®rms will tend to pay too little attention to issues with highly uncertain orhighly unlikely outcomes (Dutton and Webster, 1988; March and Shapira, 1987).The cases reported here, by contrast, illustrate that there are also instances inwhich ®rms do try to identify and address such risks.These decisions involved low-probability, high-consequence risks, which make

for highly unsettling, ambiguous decision contexts. The decision makers expresseddiscomfort about the inherent ambiguity of probability estimates about such rareevents. Half the teams in the cases did not even try to estimate probabilities; theother half estimated them but relied on nonprobabilistic judgements when theymade their ®nal choices. Thus, ambiguity was largely handled by minimizing therole of ambiguous estimates in the decision process. This is consistent withprevious work on Lp-HC risks by Ferry and Kydd (1992) and by Bowman andKunreuther (1988).The decision makers in these ®rms sought to increase their comfort about making

these decisions in the face of great ambiguity. They found comfort in accountabilityrather than in analysis. Anticipated judgement by juries and governmental bodieswere invoked. The managers adopted decision rules that would be acceptable to layjudges, that were consistent with lay decision predilections as understood frombehavioural decision research. In addition, the managers appealed upward in theirhierarchies to check whether their choices were consistent with organizationalpreferences. Eisenhardt (1989) has previously found that managers appeal upwardin order to increase their comfort with decision under uncertainty. In these cases weobserve not just a direct appeal but also adoption of heuristics consistent with antici-



pated accountability. Thus, the cases suggest a bit of con¯ict among societal incen-tives. Strict liability presumes cost±bene®t type logic will be employed, externalitieswill be computed and investments made accordingly. The decision processesemployed in these cases indicate that, at least under conditions of great uncertaintyand ambibuity, threshold heuristics are used instead.

NOTES

*This research was supported in part by the US EPA's Chemical Emergency Prepared-ness and Planning O�ce. The author would like to thank the study participants for theirtime and dedication. Thanks also to Karen Chinander, Neil Doherty, Eric Eskin, MarkFiegener, Howard Kunreuther, Patrick McNulty, Isadore Rosenthal, William T. Rossand several anonymous JMS reviewers for valuable discussion and comments.[1] Notably, the safety-investment incentive only works up to the point where the ®rm's

potential legal liabilities exceed its assets. A ®rm will expect not to bear the costs oflosses that exceed the total discounted future value of its assets, and so has noincentive to invest to prevent these.

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Preventive Choices: Organizations' Heuristics, Decision Processes and Catastrophic Risks