Why good project managers make bad choices
an introduction to project decision-making
Most project problems are the result of human errors. Why are good and experienced project managers making bad choices that can dramatically affect their project? The answers lie in human psychology. Often managers are making their choices not by logical and comprehensive analysis of the problem, but based on their own gut feelings. Understanding a few basic concepts, such as how human mental machinery works, helps to improve the project manager’s decision-making skills. But what is the alternative to the intuitive decision-making process? This paper includes an overview of the structured decision analysis process. If a project manager and an organization follow a consistent, comprehensive, and continuous process, it usually leads to better decisions. This process includes phases of decision framing, modeling the situation, analysis, and evaluation, monitoring, and review of the decisions.
Power of Illusions
During the 1980s, the North Korean government was looking to make a bold statement to the outside world that would illustrate the country’s industrial and technological power and attract much needed foreign investment---and what better way to accomplish this than by constructing one of the largest buildings in the world, the Ryugyong Hotel (Exhibit 1). This enormous building was planned to reach a height of 1,100 feet and to be comprised of 105 floors (Emporis, 2007a). The North Korean government envisioned this building as a channel to attract foreign investors. Construction was halted in 1992, however, leaving behind a massive concrete shell devoid of all windows and fixtures. The cost of this project represented an investment of a significant percentage of the North Korean GDP. As it stands, the construction of the Ryugyong Hotel has had the exact opposite effect that was intended by the Korean leaders. While we can understand the motivations behind the decision to start the project, the question remains why the project was undertaken in the first place. Were the North Korean leaders unaware of the potential costs? Even given the large amount of risks and uncertainties associated with a project of this size, calculating the costs was not an impossible task.
Exhibit 1--Ryugyong Hotel: A Monument To Irrationality
Although they may seem to be different, many project failures have a couple of things in common. First, project managers of most such projects did have a choice. In the above-mentioned example, North Korean’s government could have chosen not to build an impossibly extravagant skyscraper. Second, these were not trivial choices: economic calculation with risks and uncertainties can be quite complex. Finally, eventually these choices led to negative consequences, as they were essentially irrational.
What do we mean when we refer to something as irrational? People often use long words to describe simple concepts in the hope that it makes them sound intelligent or hide their true meaning. So they will use words like irrational when stupid would do just fine. However, irrationality is not stupidity, it is a contradiction. It is a contradiction between what we would like to achieve and how we actually choose to achieve it. Why do these contradictions, these irrationalities occur? Why are people unaware that the decision they have made will not achieve the results they expect? These people are smart, educated, and are capable of making rational choices, but fail to do so on a very predictable basis.
In reality, these decision makers, these normal people become the victim of an illusion. Criss Angel is an illusionist and the star of his own show, “Mindfreak.” In one memorable show, he hypnotized and levitated a young lady in front of stunned spectators on the street of Las Vegas. It was incredible and yet it was an illusion: both the live and TV audience appeared to see the young lady floating in the air; however, according to well known laws of physics, we all know that there must have been some sort of support. An interesting phenomenon that all types of illusions have in common is that they require people to make similar mental errors. All of the spectators shared the same perception during Criss Angel’s levitation trick: they could not see anything supporting the lady. Such mental mistakes are similar for all people regardless of all the other factors that seem to distinguish us from each other: for example, place of birth, income, nationality, sexual orientation, political preferences, and language. For example, the mental errors made by a CEO and by a dishwasher will be the same, but, in terms of conducting business, the CEO’s errors will have much greater impact.
Let’s return to Las Vegas. Here is the question for you. Take a look at the picture of Bellagio hotel (Exhibit 2) and guess how many stories there are. Most people estimate that it has about 20 stories, which is precisely what the architect wants us to see. The actual number is 36 (Emporis, 2007b). The difference between the estimates and reality is caused by a well-designed optical illusion. In addition to optical illusions, several other types of standard mental errors affect our human judgment. For example, when you walk on big suspension bridge like the Golden Gate Bridge in San Francisco, you will be very uncomfortable because of the significant sway of the span in a windy weather. You may think that the bridge is dangerously unstable. This is an illusion: bridge movements are perfectly safe (we do trust the structural engineers). The Ryugyong Hotel project is an example a contradiction: instead of becoming the first building outside New York or Chicago with over 100 floors or the largest hotel building in the world, it earned another title: the world’s Tallest Incomplete Building.
Exhibit 2—Bellagio Hotel in Las Vegas
(One of the best examples of optical illusion in architecture: number of floors in this hotel seems to be much less than it actually is)
If critical decisions did not use the same mechanism that lead to illusions, we would have nothing to worry about. If you take in one of Criss Angel’s shows, see a levitated lady and appreciate the skills behind the performance, this is nothing but good entertainment. However, if after seeing the “Mindfreak” show, you conclude that the law of gravity has been repealed and you start promoting a new theory of spiritual levitated balance in project management, it can lead to some irrationality. Unfortunately, people often base their decisions on such illusions, which can have disastrous consequences.
Why Is Recognizing and Dealing with Mental Errors so Difficult?
All people make these mental errors, so why all the fuss, you might ask. Mistakes can be identified and fixed.
But here is the problem. The mental errors that cause irrational decisions in project management can be very cunning. They can hide their tracks so well that it is often very difficult to determine if there was a mistake and, if you can determine that a mistake was made, if can be hard to identify what caused it. People who are extremely competent in one area often display poor judgment in others. This explains why experienced politicians often cannot properly manage their finances, and why successful businessmen rarely excel in public office. Thomas Jefferson, the third President of the United States and one of the chief architects of the American constitution, was deeply in financial debt (Sloan, 2001). During his career in office, Jefferson attempted numerous times to abolish or limit the advance of slavery and strongly believed that society must free all slaves. At the same time, he owned many slaves and did not free any because of his personal financial difficulties. Obviously, if someone like Thomas Jefferson can find themselves in such an irrational situation, anyone can. But why is it so easy to get caught in these irrational situations? Why is irrationality so widespread?
One of the most common sources of such mental errors is people’s difficulties in assessing future uncertainties. Wouldn’t life be a bit more bearable if we could accurately predict what would occur as a result of our actions? You start smoking: now you will die from lung cancer on January 17, 2021---24 years earlier than if you hadn’t smoked. If you go to the casino today, you will lose $12,798.67, but if you hold off until tomorrow, you will win $6,589.32. However, eliminating all uncertainty would have some drawbacks, since uncertainty is the basis of entire industries. Who needs insurance if you know that your car will be stolen on September 20, 2017? Say good bye to your investment advisor: invest in Enrot, Inc., and your stock portfolio is guaranteed to reach a value of $1,000,000 on December 17, 2011. But it doesn’t work that way, does it? For example, if you asked people to estimate the risks associated nuclear and fossil fuel power, most would believe that nuclear power is more risky, when in reality the chance that the burning of fossil fuels will damage your health is much greater.
Here is another issue that leads to many mental errors: choices we make are often based on multiple objectives. Balancing such objectives can be very complex. For instance, if you want to fly from Denver to Phoenix, would you buy a ticket with a stop in Detroit for $200 or a direct flight for $300? (Airlines tell us that it makes economic sense for them to have routes with multiple stops that zigzag across the country, but we are still not convinced that it is rational.) You have to balance two objectives: convenience versus price, which may lead to irrationality.
Our decisions are often affected by motivational factors. Would you, for example, “creatively enhance” your resume to improve your chances of attracting a potential employer? Apparently, some people are engaged in a similar practice with regard to project planning, and to a much greater extent. Danish researcher Bent Flyvbjerg and his colleagues reviewed a significant number of large transportation projects: roads, railways, bridges, and tunnels (Flyvbjerg, Holm, & Buhl, 2002). They found that project planners often intentionally underestimate costs and overestimate benefits to get their projects approved. Flyvbjerg found that costs are underestimated in nine out of ten transportation infrastructure projects. He studied data dating back 70 years and found that, in spite of the introduction of new sophisticated estimation tools and techniques, cost underestimation has not decreased over time.
As a final complication, many mental errors are due to group interactions. For example, the individuals involved in the Kennedy administration’s decision to invade Cuba at the Bay of Pigs were interviewed in retrospect (Janis, 1982). Each person claimed that he had severe reservations about the invasion, but did not express them because there were afraid of appearing to be the only hesitant person in the room. If a group of people is expected to make a decision, it does not necessarily reduce the chance of mental errors; in fact, it leads to other types of mental errors.
Solution: Structured Decision Analysis
You cannot simply command people to be more rational. You cannot outlaw irrational decision making with the stroke of a pen. Displaying poor judgment is not illegal. Go ahead and paint your deck without removing the previous coat, the paint will shortly peel off, and you can repeat the exercise every summer. You hurt no one but yourself and enrich your local paint merchant in the process. In many cases, the prohibition of poor choices leads to even bigger problems as the direct or indirect costs of imposing the prohibition is greater than the perceived benefit of the prohibition. If this sounds familiar, it’s because the United States experienced this during the prohibition of alcohol, or Dry Law, from 1920 to 1933. The current “War on Drugs” has cost American tax payers billions of dollars in enforcement costs with negligible impact on either the use or availability of drugs.
The solution is to learn how to make rational choices by training yourself to overcome mental errors. For example, the newest tourist attraction in Arizona, the Grand Canyon Skywalk, is a horseshoe-shaped glass walkway 1,200 meters (4,000 feet) above the floor of the canyon (Exhibit 3). When you first step on the Skywalk, you will feel very uncomfortable as the irrational part of your brain tells you that you are in great danger and pumps adrenalin into your system, even though you know that the structure is perfectly safe. However, after few minutes, you would begin to feel a little bit more relaxed. You are able to look down longer and even may walk the loop a few more times. Essentially, you have trained yourself to overcome a common human fear. Similarly, people are capable of overcoming some of the symptoms of irrational decision making as long as they understand the potential mental errors that they can encounter (Hastie & Dawes, 2001).
Exhibit 3—The Grand Canyon Skywalk
(A good place to train yourself to outcome your biases)
But even if you have good knowledge of an area, potential problems can be extremely complex, and wrong decisions can be very costly. For example, when developing potential drugs, in which chemical should a pharmaceutical company invest its money? This type of problem carries with it a great of uncertainties, and the development of new drugs can cost hundreds of millions of dollars and require decades of effort. These are not decisions that can be made intuitively or without structure. It requires special methods to perform the analysis of complex problems: how to identify alternatives, consequences, and trade-offs; how to analyze uncertainties; and, finally, how to make a decision. A special discipline called “decision science” offers a number of analytical methods and processes aimed at reducing the chance of making irrational decisions.
Project Decision Analysis Process
Here are three basic things that a decision analysis process should have:
- Rational decisions. Quality decisions should lead to maximizing project value while minimizing expenditures. Good decisions should be based on an unbiased assessment of all possible alternatives. They should benefit the whole business, not just the interests of a specific individual or group.
- Transparent decision-making. You want to know how decisions are made, who made them, and who should be accountable if a decision is wrong. You want to be able to participate in decision-making.
- A mechanism for correcting mistakes. If there is a problem with the original decision, you should be able to recognize it and take corrective actions in a timely manner. In sum, what you want is a process. As with many other business processes, decision analysis has a set of procedures and tools that an organization can readily follow.
Decision analysis is not a single, fixed process, but rather an adaptable framework that can be tailored by an organization to meet its specific needs. There is no exact recipe for how to structure a decision analysis process. Different processes can be adopted for various companies, types of projects, and the types of decisions required. Your organization may already have, if not a fully established process, some components of decision analysis. (For example, how do you review project risks and uncertainties? How are decisions made at product launch meetings?) But what does a “fully established decision analysis process” imply? Any established or mature decision analysis process is based on three main rules, which we call the “3C” principle: consistency, comprehensiveness, and continuity (Virine & Trumper, 2007).
The decision analysis process should be standardized for similar kinds of problems and opportunities. Inconsistency in decision making can cause projects to change directions unnecessarily, which can lead to failure. This necessitates that organizations have the same set of rules and preferences for making decisions for all similar types of projects. Suppose, for example, an oil company has different offices around the world evaluating exploration prospects. The company does not have enough resources to drill everywhere at the same time, so it must make choices. The evaluations on potential drilling prospects are forwarded from the various
outlying offices to the corporate planning headquarters, where decisions about resource allocation are made. One of the main difficulties that the corporate planners face is that this information is submitted by different groups looking to develop their prospects in different locations, which are often in different countries. The planners don’t want to “compare apples and oranges,” as the saying goes, so the company tries to ensure that the methods used to generate the data regarding prospects are consistent across the organization. Otherwise it would be impossible to make a comparison of potential oil reserves and make decisions on which prospects to develop (Rose, 2001).
Decision analysis processes should include a comprehensive assessment and analysis of the business situation. Missing or incomplete information can lead to incorrect decisions. Let’s say that your manager approaches you and shows you a project schedule. He says, “We performed a comprehensive analysis on all of our possible alternatives and have decided to go ahead with this particular one.” After a brief look at the schedule, you say, “Looks like it’s a very tight schedule. Did you account for any risk events? Where is the contingency time?” “Don’t worry about contingencies,” he replies. “We covered everything. If you recall, we have done some similar projects in the past and didn’t have any problems. Plus, the decision has come down from up high, so it’s out of our hands.” Two days into the project, a major event occurs and the project is delayed. Did upper management perform a comprehensive decision analysis as claimed? No, because they relied simply on their experience of some past projects and did not include risks and uncertainty. The analysis was not comprehensive, and therefore it was flawed.
Decision analysis is a continuous process of evaluating and refining decisions during the course of a project. High-quality results can be achieved only through constant and consistent adaptive management. Here’s an example of failing to use adaptive management:
You recently completed a project and presented it to your client. Unfortunately, the client is not very happy. Why? A couple of years ago, when the project was initiated, somebody made an incorrect decision that appears to have reduced the value of the project due to huge cost overruns. The person responsible for that decision is no longer on the team, so it will be difficult to understand the basis for it. And why were no corrective actions taken when it became obvious that the evaluation of cost was flawed?
Upon further investigation, you discover that it is not a common practice in your organization to revisit a decision once it has been made. In addition, when the problem surfaced, a great deal of resources had already been expended, and there was a great reluctance at that point to change course. The final result is that your project failed to meet its requirements because the team did not adapt to changing circumstances.
Phases of the Decision Analysis Process
The decision analysis process includes a number of phases, with each phase in turn consisting of several steps (Skinner, 1999; Schuyler, 2001; Virine & Trumper, 2007).
Phase 1: Decision Framing
Decision framing helps decision makers to identify potential problems or opportunities; to assess business situations; to determine project objectives, tradeoffs, and success criteria; and, finally, to identify uncertainties. The project manager defines the scope of the decision. Depending on the situation, a project manager alone, an independent expert, or a team of experts can perform the decision framing.
- Identifying potential problems and opportunities. In some cases, it is difficult to identify problems and opportunities, especially when they are related to a strategic decision. For example, what causes different projects within the organization to be consistently late?
- Assessing the business situation. Before making a decision, it is important to assess the business environment and define the constraints related to the problem. Business environments can influence resource availability and costs. The assessment may also include an analysis of markets, competition, prices, or anything else that can be related to the problem or opportunity. During this step, it is important to list all external factors that may have an impact on the problem.
- Determining project objectives, tradeoffs, and success criteria. Projects usually have multiple objectives and therefore multiple criteria for decision making, which can make the analysis very complex. Decision-making criteria include project duration, cost, scope, quality, and safety, among other parameters. Project managers should find the right balance between these objectives and make trade-offs when necessary.
- Identifying uncertainties. Understanding uncertainties is the key to the decision analysis process. In the decision-framing step, risks and uncertainties should be identified. Uncertainties can be found in a project’s cost, scope, duration, quality, safety, or environment.
- Generating alternatives. In decision framing, it is important to generate key alternatives. First, you must identify what cannot be changed---that is, what the constraints are in the particular decision analysis. Then you can determine potential alternatives.
Phase 2: Modeling the Situation
A mathematical model can help to analyze and estimate future events. To understand how a structure withstands particular loads, engineers perform structural analysis on buildings using mathematical models. They don’t want to find out that a particular beam cannot bear a load after it has been put in place, because by then it may be too late to change it. The same situation exists with any other projects.
- Creating models for each project alternative. Project managers constantly create mathematical or valuation models of projects. In most cases, it is simply the project schedule. A more comprehensive model of a project includes a breakdown of resources, costs, and other project variables. Sometimes, quite elaborate models are required. For example, in the analysis of a product’s life cycle, comprehensive models will include not only product development but also marketing and sales efforts.
- Quantifying the uncertainties. The uncertainties in a project, identified through the decision-framing process, should be quantified. One of the ways to quantify uncertainties is to define ranges for their parameters. For example, define low (optimistic), base (expected), and high (pessimistic) duration or cost estimates for each task. Another way to define uncertainties is to list all of the potential events that could affect the project schedule, then quantify their probabilities and impact.
Phase 3: Quantitative Analysis
After the mathematical model is ready, the analysis may include a number of steps, depending on the situation. It is possible to apply simulation techniques to analyze the project. These techniques can give project managers enough data to make an informed decision. For example, quantified analysis may show that the chance that a project will be completed on time equals 80%. Is this acceptable? It may be in some projects, but not in others. In addition, the results of quantitative analysis must be communicated properly to decision makers to minimize the potential for biased decisions.
- Determining what is most important. A model of a project can include a considerable number of variables: large numbers of tasks, resources, risks, and other parameters. Some of these parameters may significantly affect the course of the project. For example, certain risks will cause failure of the project, whereas other risks will have no noteworthy effect. It is impossible for a project manager and a project team to concentrate their efforts on mitigating all possible risks. The team should therefore focus first on mitigating critical risks.
- Quantifying risks associated with the project. Uncertainties associated with input parameters were already quantified during the modeling step. Now you need to analyze how the combination of all these uncertainties could affect the project. The goal of this analysis is to create a “risk profile” of the project.
- Deciding on a course of action. In some cases, it is easy to select the most efficient alternatives based on the results of risk analysis. The best alternative based on selected success criteria may be obvious and can be easily selected without further steps. In many situations, however, the selection between the alternatives is not so easy. Sometimes, different scenarios are executed only if certain conditions exist. In many cases, decisions are made using numerous criteria, which complicates the selection of the most efficient alternative.
Phase 4: Implementation, Monitoring, and Review
- project implementation and monitoring. Now the decision has been made, and the selected course of action is under way. In many cases, a new decision-framing step will be required if a new decision within the same project is required. Tracking project performance helps you to forecast what could happen to the project, even if some activities are only partially completed. Before the project started, you had only one source of input information for the decision analysis process: historical data, which is either objectively defined based on certain records or is the result of expert judgment based on past experience. Now the project manager can also use actual project performance to make decisions.
- Review of the decision experience. You need to know whether your analysis and decisions were correct. Otherwise, you will make the same mistakes all over again.
Decision analysis methods are actively used in many areas. Lawyers use decision analysis methods to choose litigation strategies under uncertain circumstances. Through this process, they can tell you if it makes sense to appeal federal court decision or not to sue your neighbour because his dog dug up your roses. Doctors use decision analysis tools to make more accurate diagnoses. Investment brokers use sophisticated decision analysis methods to improve their investment advice. Pharmaceutical companies use advanced analysis to determine strategies for the clinical trials of new drugs. Oil companies plan their exploration and production activities using decision analysis. (This probably does reduce the prices we pay at the pump, but certainly improves executive bonuses.) Despite all of the advances in decision science, most people and many organizations opt not to use decision analysis tools and methodologies, and this reliance on our relatively primitive psychological decision-making abilities is the cause of irrational decision making.
Emporis.(2007a). Ryugyong Hotel. Retrieved September 14, 2007, from http://www.emporis.com/en/wm/bu/?id=ryugyonghotel-pyongyang-northkorea
Emporis. (2007b). Bellagio Resort and Casino. Retrieved April 7, 2008, from http://www.emporis.com/en/wm/bu/?id=bellagioresortcasino-lasvegas-nv-usa.
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Schuyler, J. (2001). Risk and decision analysis in projects (2nd ed.). Newtown Square, PA: Project Management Institute.
Skinner, D. (1999). Introduction to decision analysis (2nd ed.). Gainesville, FL: Probabilistic Publishing.
Sloan, H. E. (2001, December). Principle and interest: Thomas Jefferson and the problem of debt (Jeffersonian America). University of Virginia Press.
Virine L., & Trumper, M. (2007). Project decisions: The art and science. Vienna, VA: Management Concepts.
© 2008, Lev Virine
Originally published as a part of 2008 PMI Global Congress Proceedings – Denver, Colorado, USA