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 is a discrepancy 30% 35% 40% 45% 50% 55% 60% 70%
between somebody’s
judgment and 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
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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
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Questions?
