Decision-Making In Project Management Introduction to project decision analysis

Example: San Francisco Bay Bridge Beginning 2005 – Decision to stop construction Later 2005 – Decision of continue construction based on original project Result: $81M cost overrun. Will be paid by California taxpayers and toll payers

Burden of Poor Decisions Cost of poor decisions in pharmaceutical industry is passed to consumers Dry hole cost in oil and gas industry is passed to motorists Wrong policy decisions by government will be passed to taxpayers You paint your deck without properly removing old paint. You have to do it again next year.

Why is decision-making so complicated ? Most problems in project management involve multiple objectives Project managers are always dealing with uncertainties Project management problems may be very complex Most projects include multiple stakeholders

Two decision-making approaches: How are decisions made? No uncertainties – No alternatives No alternatives – No decisions Two decision-making approaches: Advocacy-based approach Decision Analysis Process

Decision Analysis Process Do We Have a Solution? Decision Analysis Process Decision Science Theory of Probability and Statistics Psychology of Judgment and Decision Making

Human Judgment Is Always to Blame A study by Swiss Federal Institute of Technology in Zurich analyzed 800 cases of structural failures where engineers were at fault. In these incidents 504 people were killed, 592 injured and millions of dollars of damage incurred. Insufficient Knowledge – 36% Underestimation of influence – 16% Ignorance, carelessness, neglect – 14% Forgetfulness – 13% Relying upon others without sufficient control – 9% Objectively unknown situation – 7% Other factors related to human error – 5%

Blink or Think?

Intuitive Thinking When you think automatically and sometimes when you are analyzing a situation, you apply certain simplification techniques. We use these techniques due to limitations in our thinking mechanisms. In many cases, these simplification techniques can lead to wrong judgments. Vulcans like Mr. Spock make logical choices, but not necessarily the best ones.

Decision-Making Training You can train yourself to overcome biases the same way as you train yourself to walk on the glass floor of Toronto’s CN Tower

Garbage In/Garbage Out: Project managers know it Uncertain input data Advanced analytical tools Solutions: Perform analysis based on reliable historical data Track project performance and constantly refine data Useless results of analysis

Biases Cognitive – hard to detect, possible to mitigate by training Motivational – easy to detect, hard to mitigate negative effect Bias is a discrepancy between somebody’s judgment and reality

Heuristics and Biases The Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel 2002 Decision makers use “heuristics”, or general rules of thumb, to arrive to at their judgments. Daniel Kahneman for having integrated insights from psychological research into economic science, especially concerning human judgment and decision-making under uncertainty In certain instances they lead to systemic biases.

Some Heuristics in Probabilistic Business Modeling Representativeness – unwanted appeal to detailed scenarios Availability – access the probability of an event by the ease with which instances can be brought to mind. Anchoring – human tendency is to remain close to the initial estimate Solution: establish an uncertainty management process in the organization

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Edon Brunswik ‘s Lens Model Selective Perception “I see what I want to see” Overconfidence Confirmation bias Edon Brunswik ‘s Lens Model

Selective Perception Are you motivated to see the project in a particular way? What do you expect from this particular decision? Would you be able to see project differently without these expectations and motivational factors?

Behavioral Traps Sunk cost effect Investment trap (Money Pit Movie) Time delay (balance long-term and short-term goals) Ignorance trap – usability to realize consequences of wrong decisions for a long time Deterioration trap (maintenance of legacy products)

Framing Scenario 1: You are involved in a construction project worth $300 million and have discovered a new approach that would save $1 million. It will take you a lot of time and effort to do the drawings, perform structural analysis, and prepare a presentation that will persuade management to take this course. Would you do it? Scenario 2: You are involved in an IT project worth $500,000 and discovered a way to save $80,000. You need to spend at least a couple of days for researching and putting together a presentation. Would you do it? Scenario 3: You are involved in the same construction project as in Scenario 1 and found a way to save $80,000 (replace one beam) and need to spend a couple of days on research and the presentation. Would you do it?

Decision Analysis Manifesto What do we want from decision analysis process? We want the decision to be made rationally. We want decision-making process to be transparent We want to have a mechanism to correct mistakes

Decision Analysis Process

3D Principle of Decision Analysis

Decision Analysis Process vs. PMBOK© Guide Risk Management PMBOK Risk Management Process Tools and processes to manage risks

What is the rational choice? Decision policy is a set of principles or preferences used for selection alternatives. Is he rational decision maker? Strong emphasis on profitability; Low emphasis on the safety of adversaries and a strong emphasis on the security of its own employees with a special concern for management; Low regard for following legal rules and regulations; Strong emphasis on organizational structure including clear definitions of roles, responsibilities, and reporting; Strong emphasis on fostering good relationships with the local community . Rational behavior is behavior that maximizes the value of consequences and based on decision policy

Expected Value For example, a big pharmaceutical company has two choices: Continue developing a drug. The chance that it will get FDA approval is 80%. If the drug is approved, the company will get $800 million, but if it fails, the company will have lost the $200 million it in development costs (20% chance). Buy another company that has already developed an FDA approved drug. The estimated profit will be $500 million dollars.

Decision Trees Expected value is a probability-weighted average of all outcomes. It is calculated by multiplying each possible outcome by its probability of occurring and then adding the result.

Utility Function Utility reflects a preferences of decision-maker toward different factors, including profit, loss, and risk.

Risk Avoider vs. Risk Taker

Additional Resources Project Think: Intaver Institute 2011 Additional Resources Project Think: Why Good Managers Make Poor Project Choices Project Decisions: The Art and Science Introduction to Project Risk Management and Decision Analysis Project Risk Analysis Made Ridiculously Simple

Questions?