Sunday, July 11, 2010

We just ain't that good at risk




One of the things that has always fascinated me as I've studied project management is the aspect of risk.

Risk is the engine of projects. Think about it. Without risk, projects would be planned, everything would go as planned (no threats...no opportunities) and we, as project managers, would be responsible only for checking boxes on a checklist.

How boring.

But of course (witness exploding and leaking oil wells!) threats do occur. Projects do go off course. We do need to deal with uncertainty.

In fact, it's probably the only thing that IS certain about a project - the uncertainty, that is. And that keeps us, well... employed.

All of this said, it's also interesting to note that humans are not built well to deal with risk. In fact, there are huge monuments to this disability located all over the world. They're called casinos. Logic would tell us that if the organizations that build these things are rich enough to make them look like they do - with extravagant waterfalls, marble foyers and gold statues - they are most likely winning while we are losing. Yet we go back again and again.

I'd like to share with you a snippet from a great book I'm reading called "The Paradox of Choice" by Barry Schwartz.

Imagine that you have decided to see a concert where admission is $20 a ticket. As you enter the concert hall, you discover that you have lost a $20 bill. Would you still pay $20 for a ticket to the concert?

Answer honestly.


Now scroll down for what people say in general - and another scenario.













Almost 90 percent of respondents say yes.


Now try this one:

Imagine that you have decided to see a concert and already purchased a $20 ticket. As you enter the concert hall, you discover that you have lost the ticket. The seat was not marked and the ticket cannot be recovered. Would you pay $20 for another ticket?

Answer honestly again. Then scroll down.














In this situation, less than 50 percent of respondents say yes.

Kahneman and Tversky(two scientists who've studied human behavior in uncertain conditions) suggest that the difference between the two cases has to do with the way in which we frame our "psychological account. Suppose that in a person's psychological ledger there is a "cost of the concert account. In the first case, the cost of the concert is $20 charged to that account. But the lost $20 bill is charged to some other account, perhaps "miscellaneous. But in the second case, the cost of the concert is $40; the cost of the lost ticket, plus the cost of the replacement ticket, both charged to the same account.

---

So what's the lesson here?

Acknowledge that we're not good at managing risk with (only) our gut.

Acknowledge that the tools and techniques given to us by our PM books and mentors are worthwhile. Don't try to manage projects ONLY with your gut. Your gut is fine, but not all by itself. Look what it's done for the casino business!

8 comments:

Andrew Meyer said...

Rich,

great point. Let me offer a slightly different perspective.

Risk is like the boy who cried "wolf". If one had to have mitigation strategies for every risk, no project would ever get off the ground. Embarking on any endeavor always entails risk, much of which you either have faith that it will be resolved or else you don't attempt the project.

Maybe its a little like having kids. If anyone objectively stopped to consider all the risks and potential problems, you'd never have kids, hell, one might not ever had sex! But people don't consider all the risks.

Maybe they consider the "soluble" risks or the well known risks, but telling a horny teenager about possible problems is about as meaningful as telling an executive about all the possible risks to executing a project.

Well, actually, its not. The teenage is actually going to take part and will (presumably) enjoy the experience, the executive will simply get paid...

Love your stuff,

Andy

Glen B. Alleman said...

Kahneman and Tversky's Prospect Theory says we treat cost and uncompensated losses differently, even though their impact on us is identical.

Projects contain both risk and uncertainty. The uncertainties can be classified as (i) variation; (ii) foreseen risk; (iii) unforeseen risk; and (iv) chaos.

We should no confuse the two.

Project Manager said...

risk in project management has been a tandem they goes together, everything has to rely on how we target the risk and avoid it and what strategies would fit best to get the best result for every task.

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