The Pitfalls in Ethical Decision-Making

We use good faith practices every day, but are we thinking about the decision-making process itself?

June 23, 2016 Photo

As claims professionals, we make decisions daily that affect the bottom line of our employer, client, or policyholder. We set reserves, pay claims, hire experts and lawyers, and, sometimes, we deny coverage for a claim. We make decisions using good faith claims handling practices, state regulations, case law, and our employer’s code of ethics or conduct. But we never truly think about the decision-making process itself.

Why should we even care about how we make decisions? We should care because bad decisions and unethical decisions cost money. Bad decision-making may be the biggest cost factor for businesses today, and ethical business decisions result from a decision-making process. Generally, the process looks like this:

  1. Identify the issue.
  2. Gather information and facts.
  3. Identify any duties and obligations owed to those stakeholders who will be affected by the decision.
  4. Identify any standards, codes, rules, regulations, or laws that may apply to the issue.
  5. Create three or more options for actions.
  6. Evaluate the consequences of each option.
  7. Implement your decision.
  8. Monitor the consequences of the decision for the involved parties and stakeholders. 

None of these steps are difficult to accomplish except step five, creating three or more options for action. Creating three or more possible options requires that you be willing to think about the issue from someone else’s perspective. It requires that you hold the interests of others equal to, if not more important than, your own. This one step in the process is where ethical business decision-making often goes off the rails.

As human beings, we are hindered by rationalization and cognitive bias. If we examine our use of rationalization and our cognitive biases, we can try to avoid them in our decision-making. Rationalization allows us to justify our decisions with a seemingly logical and coherent set of facts and assumptions. For example, we might rationalize a decision by saying that, since it is legal, it must be ethical. We might rationalize a decision by saying that since it is “necessary,” it must be ethical. Other popular rationalizations include “It is for a good cause,” and “It is part of the job.” Rationalization is the easy way out. It allows us to make a decision and avoid the requisite decision-making thought process. It leads to costly mistakes and unethical behavior.

Cognitive bias is our own subjective view of the world. It is a pattern of thinking that involves information-processing shortcuts, emotional motivations, and social or outside influence. Cognitive bias is not always a bad thing. In a positive context, cognitive bias allows us to make faster decisions when time is more important than accuracy.

For ethical business decisions, it is essential that claims professionals are aware of the cognitive bias in their thinking. Two cognitive biases that can hamper a claims professional are anchoring and the availability heuristic. Anchoring is an overreliance on the first piece of information you receive. For some reason, we are loathe to let go of that first opinion once formed. Ethical claims professionals need to remain open to changing their minds as new facts are presented.

The availability heuristic is our bias toward overestimating the value and importance of the information on hand. While it is acceptable to form an opinion with the information available, one should not value this information more highly than information that is not readily available. Sometimes what we do not know is equally as important as what we do know. There is a corollary bias called “recency,” whereby we tend to value the latest information more heavily than older information. The bottom line is that we need to be evenhanded in our evaluation of facts in a claim.

The clustering illusion is another cognitive bias that can work its way into a claims professional’s decision-making process. The clustering illusion is our tendency to see patterns in random events. This often appears in fraud and coverage investigations. Avoid the tendency to link unrelated facts into a pattern that supports a preconceived decision.

Stereotyping is a cognitive bias that can lead us into bad faith claims handling very easily. Any evidence of stereotyping in a claim file can be fodder for a bad faith allegation. A corollary to stereotyping is confirmation bias. This bias means we tend to heed only the information that confirms our preconceived opinion.

Finally, information bias may be the most dangerous of all. This is our tendency to continue to search for more information even when it is not needed to make a decision. Many claims handlers fall prey to this for fear of making a wrong decision.

Recognizing the effect of rationalization and cognitive bias and taking steps to avoid them can help you make more ethical business decisions. By bringing these issues to a conscious level, it is likely that your decisions will improve.

Tracking the decision-making process is another method to ensure better outcomes. Document each step so that you can determine where any possible flaws in fact-finding or evaluation occurred. Using a process highlights the need for giving sufficient time and effort to making an ethical business decision. Due to time constraints, it may be necessary to make quick decisions on less meaningful issues or choices that are reversible so that sufficient time can be given to more important decisions.

Be aware of the role emotion plays in decision-making. The more you are overloaded with work, juggling too many priorities, and battling information overload, the more likely you are to make a poor ethical business decision. Try breaking down major decisions into component parts. Smaller decisions are easier to make.

Lastly, remember that even a well-thought-out decision can have an unexpected outcome. Avoid wasting time and energy on decision regret. While we cannot change the past, there are very few decisions that cannot be fixed.

About The Authors
Donna J. Popow

Donna J. Popow, JD, CPCU, AIC, is president of Donna J. Popow LLC, and has more than 25 years of experience in the property and casualty insurance industry. She has been a CLM Fellow since 2007 and can be reached at (215) 630-0829.

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