576 Chapter 13 The Value of InformationDiscussion Question In August 1999, Bridgestone/Firestone Inc. recalled
6.5 million tires in the wake of a number of tire-related rollover accidents in
the Explorer SUV produced by Ford Motor Company. Although Firestone
tires have an admirable overall quality record and the Explorer ranks second
in its safety record among eight leading brands of SUV, 88 fatalities in the United
States and as many as 50 fatalities overseas have been linked to the combina-
tion of Firestone tires (three particular brands) mounted on the Explorer. A
review of the Firestone/Ford debacle shows that both companies (as well as
the National Highway Safety Administration) lacked the data to allow early
recognition of this accident risk. (To this day, there is no way to “prove” the
exact causes of the tire failures. Evidence and analysis of the safety risk is
purely statistical.)
a. Ironically, the low overall rate of tire-related accidents made it more
difficult to detect the particular Firestone/Ford risk. Why would this
be the case? Until 1999, Firestone relied exclusively on the low rate of
tire claims under warranty to conclude that its tires were safe. Why
might reliance on warranty data alone be a mistake?
b. The rate of tire failure is associated with multiple factors. The
Explorer accidents with Firestone tires tended to occur at high speeds
and at high temperatures. In addition, low tire pressures,
recommended by Ford to increase ride comfort, tended to create
more road friction and heat. (Carrying heavy loads has the same
effect.) Precisely because the risk was associated with multiple,
simultaneous factors, it was much more difficult to detect. Why would
this be the case? (Hint:Screening factors individuallyproduced no
obvious warning signals.)
c. Ford believed that the major fault was with Firestone’s tires. Firestone
contended that its tires were absolutely safe under its recommended
operating conditions, and that the Explorer’s design and operation
were the major culprits. What kind of information would one gather
to assess these rival arguments? Explain.Spreadsheet Problems
S1. Individual investors face a daunting choice of thousands of stock and bond
funds and fund managers. The following (stylized) spreadsheet example
tries to distinguish superior fund managers from the throng of average
managers based on their past track records of performance. Suppose
there are three types of mutual fund managers: Superior (20 percent of
the population), Average (60 percent), and Inferior (20 percent). In any
six-month period, superior managers earn positive returns 70 percent ofc13TheValueofInformation.qxd 9/26/11 11:02 AM Page 576