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
 How are decisions made?

No uncertainties – No
alternatives
No alternatives – No decisions

Two decision-making approaches:

Advocacy-based Decision Analysis

approach Process
 Do We Have a Solution?

Decision Analysis Process

Decision Science

Theory of Probability Psychology of

and Judgment and
Statistics 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
Useless results of
constantly refine data
analysis
 Biases
• Cognitive – hard to detect, possible to mitigate by training
• Motivational – easy to detect, hard to mitigate negative effect

Reality

Bias
Bias isis aa discrepancy
discrepancy 30% 35% 40% 45% 50% 55% 60% 70%
between
between somebody’s
somebody’s
judgment
judgment and and reality
reality Your judgment

What caused this error in judgment?

 Heuristics and Biases

The Bank of Sweden Prize in Decision makers use

Economic Sciences in Memory
“heuristics”, or
of Alfred Nobel 2002
general rules of
Daniel Kahneman thumb, to arrive to at
their judgments.
for having integrated insights
from psychological research
into economic science, In certain instances
especially concerning human they lead to systemic
judgment and decision- biases.
making under uncertainty
 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
 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” Edon Brunswik ‘s

• Overconfidence
Lens Model
• Confirmation bias

External World Psychological Processes

Input Judgment

Lens of Cues
 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

Steps of Decision Analysis Process Project Risk Management

Processes (PMBOK)

Identification Problems or Opportunities

Decision Assessing Business Situation Risk Management Planning
Determining Success Criteria Risk Identification
Framing
Identifying Uncertainties
Generation Alternatives

Modelling
Creating Models for Project Alternative Qualitative Risk Analysis
the Situation Quantifying Uncertainties

Determining What Is Most Important

Quantitative Quantitative Analysis
Quantifying Risks Associated with Project
Risk Response Planning
Analysis Determining the Value of New Information
Deciding on a Course of Actions

Implemetation Implementing the Best Alternative

Monitoring the Project Implementation Risk Monitoring and Control
Monitoring
Evaliation of the Decision Experience
Evaluation
3D Principle of Decision Analysis
 Decision Analysis Process vs.
PMBOK© Guide Risk Management

Decision PMBOK Risk

Analysis Process 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

FDA Approval
$800M
80%
Develop own

No FDA Approval
-$200M
Strategy 20%
Decision

Buy Company
$500M

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

Objective Measure
(Money)

Utility reflects a preferences of decision-maker toward

different factors, including profit, loss, and risk.
 Risk Avoider vs. Risk Taker

Utility
Risk Neutral Decision Maker

Risk Avoider

Risk Taker

Objective Measure
 Additional Resources

Project Think: Project Decisions: Project Risk

Why Good The Art and Science Analysis Made
Managers Make Introduction to Ridiculously Simple
Poor Project Project Risk
Choices Management and
Decision Analysis

29
Questions?