Homer J. Simpson – a generic case study30 April 2001
The Homer J. Simpson power plant in the US Midwest is in its fourth decade of operation. The plant manager is faced with four choices: decommission; sell; upgrade; or do nothing. Professor Nick Chater explains how pitfalls in the decision-making process can arise.
Option 1: Decommission now
Operating costs are increasing, and Homer J. Simpson will eventually need to be decommissioned anyway. The land may well be worth a substantial amount, or perhaps the utility company might be interested in building a more profitable power station (not necessarily a nuclear one) on the site.
”One big problem with this is temporal discounting – people greatly value the present at the expense of the future. Hence, long-term benefits (even within their own lifetimes) are often vastly underweighted against present concerns in decision-making. This is exacerbated in commercial contexts, to the degree that the decision-makers may not even be around for the ‘good times’.”
Option 2: Sell Homer J. Simpson
This means that decommissioning costs will be passed on to the buyer. Some companies would be interested in buying now, but as the years go by they will be less interested.
”This is a potentially attractive option to a ‘holding company’ who is just interested in the finances. To industry insiders, this will be a difficult choice to make because it can lead to personal loss of power and job. More importantly, due to overconfidence, people generally believe that they can do much better than others could. So, if another company can make money out of the plant, then the current one would believe they could make even more. The degree of other companies’ interest is an indication to them of how unwise it would be to sell.”
Option 3: Upgrade
Spending a lot of money on Homer J. Simpson would make it a much more efficient plant. Profits would go up but this would mean a large investment in time and money. A case for getting an operating licence extension could then be made.
”The time discounting problem of option 1 comes into play again. However, this option is much more likely to appeal to insiders as their job and status may be enhanced. They also get to keep doing what they (perhaps overconfidently) believe they do best.”
Option 4: Defer a decision
The plant manager has the option of carrying on operating Homer J. Simpson as it is, albeit with increasing costs.
”There is undoubtedly a huge bias in individual and group decision-making to maintain the status quo. This is particularly powerful when the decision-maker(s) could have made the decision earlier but didn’t. One problem is that any change would raise the question about why the change had not been implemented before. In other words, making a change implies that you are admitting your previous failure(s). This is especially awkward in groups, as some individuals have to persuade the group to switch track, and the rest of the group is likely to want to suppress this. So each individual is unlikely even to try, with the result that unanimous inaction is maintained.”