Game Theory in Management

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Modelling Business Decisions and their Consequences

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Money is Green, Too

Categories: Risk Management

As I wrap up my month-long eye-roll on the subject of “green” project management, I must admit that the people at Gantthead have been very good sports about my playing the role of curmudgeon. But, since they have given me this amount of latitude, I’ll go ahead and test their patience just a bit further:  virtually all projects that result in an advance in technology or improvement in people’s lives are automatically green.

Of course, that assertion flies in the face of the enviro-wacko crowd, who insist that anytime “nature” is encountered by man, “nature” comes out on the losing end.  Incidents such as my previously-blogged-about saving of the whales by Rockefeller and Standard Oil, or even little things like spotted owls building nests in K-Mart signs, somehow escape them.  Early in my career I worked at the Trestle EMP Test Site at Kirtland Air Force Base in New Mexico. The Trestle was (and perhaps still is) the world’s largest all-wood structure. It was designed to provide a platform for testing the effects of Electro-Magnetic Pulse on aircraft while the planes were in-flight. Since a potential effect of an EMP on an aircraft was to render it un-flyable, the Trestle was constructed so that planes could taxi from a nearby runway and onto the “hot pad,” which was about five stories above the floor of Tijeras Canyon. There it could be bombarded by simulated EMPs without the ground interfering with the collected test data, and without any aircraft actually tumbling out of the sky.

Naturally (get it?), local environmentalists hated the whole project, dealing, as it did, with radiation research. Nevermind that the radiation involved was radio-frequency, and the site didn’t introduce any more radiation into the environment than a radio transmitting tower – this was radiation, and it therefore had to be detrimental to “the environment.”  Only problem was – “the environment” didn’t agree. A family of great horned owls set up a nest beneath the hot pad, and proceeded to raise a few generations of great horned owl chicks. Those had to be the most closely monitored non-endangered birds in history. Trestle project opponents just knew that the birds’ health was endangered. But the data never supported that supposition.

Consider the progression of the fuels mankind has used over the ages. Tribal through feudal civilizations burned wood for heat and cooking. Of course, wood comes from trees, so as the demand for energy increased, more and more trees had to be harvested. Also, wood produces far more smoke for far less realized energy than…

Coal came into widespread use at the advent of the Industrial Revolution. It was already supplanting wood as a heater of homes in London in the 1800s, but it was also preferred over wood for the running of steam locomotives.  A given quantity of coal has twice the BTUs of the same amount of wood, while emitting less ash into the atmosphere when it’s burned. Of course, coal is more difficult to extract than trees are to harvest, but the overall pattern was clearly pointed towards supplying greater energy demands with a smaller impact to “the environment,” which brings us to…

Fuel oil contains 115,000 BTUs per gallon. There are 365.5 gallons per ton of the stuff, meaning that fuel oil has almost twice the energy of coal by weight while, again, releasing fewer contaminants into the air when it’s burned. By now even the senior executives at Greenpeace should be able to pick up a pattern, a pattern which continues to manifest as we move from oil to natural gas to nuclear energy. The fuel becomes more difficult to extract, but it produces much, much more energy for fewer quantities of waste products. Note that none of these transitions happened because protecting “the environment” was a universal goal. They all came about as mankind advanced technology and searched for more efficient ways of meeting escalating energy demands – “the environment” benefitted every single time such a transition took place. In fact, the only way that the argument that mankind’s energy use is harmful to the environment can be supported is if we look to history, when energy technology wasn’t as advanced as it is now, and compare those circumstances to today’s. We may find the descriptions of a coal smog enfolding cold Londoners of the 1890s to be distasteful, but London of 1890 was a far better place to live than London of 1590, and for reasons that go far beyond preferred energy usage.

And what drives this search for advanced technology? What Edward Bulwer-Lytton, First Baron Lytton coined as “the almighty dollar.” History’s energy barons weren’t trying to improve the environment – they were trying to get rich supplying a population’s energy needs, and the natural world around them improved as a side benefit. It appears Adam Smith was more right than he realized: each person pursuing their unique economic interests not only benefits the macro economy – he also improves the environment. The (US) dollar is green, too.

Posted on: August 26, 2012 06:27 PM | Permalink | Comments (3)

At the Risk of Causing Offense...

Categories: Risk Management

That was great of my old friend, Stanly Raspberry, Private Eye, to convey a story in my last blog, about how useless it was to have risk analyst Myron Tittle tag along with him on his last case, but I’m afraid Stanly’s points were a bit subtle. So, I’ll be a little bit more blatant: much of what is presented as modern risk management is fraudulent, and a complete waste of money and time.

I offer a more thorough debunking of current risk management theory in (Marlin Perkins moment alert!) my new book, Game Theory in Management, Modeling Business Decisions and Their Consequences (http://www.ashgate.com/default.aspx?page=1751&calctitle=1&pageSubject=692&sort=title&pagecount=2&title_id=11616&edition_id=15149), but, for this blog, a couple of well-placed arguments should get the discussion rolling (or roiling).  I want to start by picking off that most irksome of risk analysts’ assertions, that “risk management” also includes “opportunity.” Note the gratuitous inclusion of the word in the Project Management Institute’s (PMI®’s) PMBOK Handbook Series on the subject, Project and Program RISK MANAGEMENT, A Guide to Managing Project Risks and Opportunities (PMI Publishing, 1992).  The risk management aficionados simply love to claim that their Gaussian curve-based models can somehow quantify how the future will unfold, so, naturally, they simply had to change the definition of “risk” to include the good with the bad. Hence, the coining of the term “upside risk,” and the inclusion of the management of upside risk, or opportunity, in subsequent PMI publications that deal with the subject. Here is a brief list of reference works that exclude any mention of “opportunity,” or, indeed, anything but hazardous or negative events being associated with the word “risk”:

·         Webster’s New International Dictionary, Second Edition, Unabridged (this book weighs 16 pounds)

·         Webster’s New Collegiate Dictionary, 8th Edition

·         The American Heritage Dictionary, 2nd College Edition

·         The Oxford English Dictionary (which, incidentally, included the word’s etymology as coming from the Latin phrase “to run into danger.”)

But, let the Project Management Institute issue “guidance”with an utterly re-defined “risk,” and all right-thinking managers must immediately adopt the new version!

Current risk analysis techniques rely to a high degree on the experiences of the project’s experts to provide best-case, worst-case, and most-probable scenarios to serve as the basis for the estimators’ cost baselines and contingency reserves. Take away the statistical analyses, the confidence intervals and Monte Carlo simulations, and this is what you have – not what went before, but what those creating the baselines perceive as what went before. Our internal narratives – including the ones that explain why the past unfolded the way it did – are full of cognitive biases, rendering the strength of our causality analyses far weaker than we believe them to be (hence, quasi-surreal events like the celebration of Groundhog Day). Why would anyone believe that, once we flip these narratives forward across the Time Now line, they can provide a workable structure for how the future will come about? And no amount of Gaussian-curve-based models overlaying these narratives can magically bestow validity to them.

As I discuss in Game Theory in Management, it’s another example of a management information system far outstripping its epistemological boundaries, and its adherents being placed in the position to having to promise to be able to return information concerning the unfolding of future events, which is obviously absurd.  Nassim Taleb, in his wonderful work The Black Swan, The Impact of the HIGHLY IMPROBABLE (Random House Trade Paperback Edition, 2010) had these two gems:

·         Also, many readers (say, those who work in forecasting or banking) do not often understand that the “actionable step” for them is to simply quit their profession and do something more ethical. (page 334)

·         This proves that everything relying on “standard deviations,” “variance,” “least square derivation,” etc. is bogus. (page 355)

And yet, a Google search on the term “risk management” returned over 63 million results (June 17, 2012), many of them organizations that offer to perform risk management services. I find it ironic that when I write about the accuracy and reliability of Earned Value information, I invariably receive comments along the lines of “It’s only a tool! It has little to do with project success!” But, let me cast any dispersions against the, in my opinion, vastly over-sold efficacy of risk management techniques, and the exact opposite happens, and to a significantly higher degree. In my previous gig, writing The Variance Threshold column for PMNetwork magazine, people would write the managing editor demanding my firing for daring to state that the definition of risk had nothing to do with “opportunity.”

So, that being my experience, I believe there to be a high probability of this blog generating some lively discussion – unless, of course, the risk management types, after having read this piece, are willing to concede the argument.

And I find that unlikely.

Posted on: June 17, 2012 08:27 PM | Permalink | Comments (3)
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