Decision-Making In Project Management

Introduction to project decision analysis

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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

How are decisions made?

Advocacy-basedapproach

Decision AnalysisProcess

Two decision-making approaches:

No uncertainties – No alternatives

No alternatives – No decisions

Do We Have a Solution?

Theory of Probabilityand

Statistics

Decision Analysis Process

Decision Science

Psychology of Judgment and

Decision Making

Human Judgment Is Always to Blame

• 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%

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.

Blink or Think?

Intuitive Thinking

Vulcans as Mr. Spock make logical choices, but not necessarily the best

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.

Decision-Making Training

You may 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

Useless results of analysis

Solutions:

1. Perform analysis based on reliable historical data

2. Track project performance and constantly refine data

Biases

• Cognitive – hard to detect, possible to mitigate by training • Motivational – easy to detect, hard to mitigate negative effect

30% 35% 40% 45% 50% 55% 60% 70%

Your judgment

Reality

What caused this error in judgment?

Bias is a discrepancy between somebody’s judgment and reality

Bias is a discrepancy between somebody’s judgment and reality

The Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel 2002

Daniel Kahneman

for having integrated insights from psychological research

into economic science, especially concerning human

judgment and decision-making under uncertainty

Decision makers use “heuristics”, or general rule of thumb, to arrive to their judgments.

In certain instances they lead to systemic biases.

Heuristics and Biases

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

Some Heuristics in Probabilistic Business Modeling

Availability

Welcome to Our Friendly Casino

This year 168,368 people lost $560M here. 5% of our guests divorced, 1% became alcoholics, and 0.4%

committed suicide.

Selective Perception

• “I see what I want to see”• Overconfidence • Confirmation bias

External World Psychological Processes

Input Judgment

Lens of Cues

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

– 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

What do we want from decision analysis process?

Decision Analysis Process

Identification Problems or OpportunitiesAssessing Business SituationDetermining Success CriteriaIdentifying UncertaintiesGeneration Alternatives

Decision

Framing

Creating Models for Project AlternativeQuantifying Uncertainties

Modelling

the Situation

Analysis

QuantitativeDetermining What Is Most ImportantQuantifying Risks Associated with ProjectDetermining the Value of New InformationDeciding on a Course of Actions

Evaliation of the Decision ExperienceMonitoring the Project ImplementationImplementing the Best AlternativeImplemetation

MonitoringEvaluation

Risk Management PlanningRisk Identification

Risk Monitoring and Control

Qualitative Risk Analysis

Quantitative AnalysisRisk Response Planning

Steps of Decision Analysis Process Project Risk ManagementProcesses (PMBOK)

3D Principle of Decision Analysis

Decision Analysis Process vs. PMBOK© Guide Risk Management

Decision Analysis Process

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:

1. 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).

2. Buy another company that has already developed an FDA approved drug. The estimated profit will be $500 million dollars.

Decision Trees

Develop own

$500MBuy Company

FDA Approval

FDA ApprovalNo

20%

80%

-$200M

$800M

StrategyDecision

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

Objective Measure

Util

ity

(Money)

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

Risk Avoider vs. Risk Taker

Objective Measure

Util

ity

Risk Avoider

Risk Taker

Risk Neutral Decision Maker

Future Reading

Lev Virine and Michael Trumper

Project Decisions:

The Art and Science

Management Concepts, Vienna, VA, 2007

Lev Virine and Michael Trumper

Project Think:Why Good Managers Make Poor Project Choices

Gower, 2013

Questions?