Game Theory in Management

One of the definitions of faith is “firm belief in something for which there is no proof.”[i] It’s a well-known fact that many people, including project managers, believe that modern risk management techniques are a valuable addition to the information streams available to them. But is there any proof of this?

I wasn’t always a risk management skeptic, you know. In fact, at one time I was such a true believer that I wrote some software that pulled project data from a popular critical-path methodology software and performed a single-tiered decision-tree analysis of a project’s WBS (at the reporting level) in order to calculate the contingency budget. Its core formula looked like this:

Cb = ( ∑ (TA1B * OOTA1) + (TA2B * OOTA2) + (TAnB * OOTAIn) ) - PMB

Where Cb is the contingency budget amount, PMB is the Performance Measurement Baseline, TA1B is task alternative #1’s budget, OO is the associated odds of occurrence, TA2B is task alternative #2’s budget, etc. The task alternative’s budgets were estimates of the impacts of various things that could happen to that particular activity. Take their sigma, subtract out the original cost baseline, and you have a risk—based estimate of the amount that should be set aside for contingency.

Of course, to make it usable we had to auto-insert some assumptions. Since 68% of all data points fall within one standard deviation of the mean, we assigned those odds to the tasks’ original estimate. The most likely alternative outcome was given the nominal odds of occurrence of 27%, since that was the amount covered under the next standard deviation.  The fairly unlikely scenarios (worst case scenarios) got the next 4.7%, and the extreme outliers were – again, as preliminary place holders – assigned the last 0.3%. When interviewing the Control Account Managers to collect their insights as to the nature of alternative task outcomes and their impacts, we would always point out that the odds initially assigned were just boilerplate, and that they should feel free to alter them, based on their expertise and experience. Interestingly enough, they rarely did.

Something else really interesting happened during these data collection interviews. When asked about alternative outcomes to the planned tasks, the CAMs were clearly engaging their imaginations, and could admittedly only speculate as to the cost or duration of the alternative endings coming about. For those risk management fans who believe that Monte Carlo analysis provides a more robust (or even valid!) approach, something very similar happens here, too. Once the “most likely,” “best case,” and “worst case” scenarios are established, almost all Monte Carlo software packages for project management invite the analyst to select a distribution curve – usually a leaning bell – to serve as the bounding parameters for the “randomly-generated” alternatives’ cost and schedule impact. But then the exact same type of processing proceeds, just with however many “randomly-generated” additional data points.

To state the blindingly obvious, this is not management science. It is an invitation to speculation, tripped out in probability-and-statistics jargon. These speculations are not, repeat not based on hypothesis, testing, and validation or refutation. Instead, they are based on the projections of the various subject matter experts, or control account managers – in other words, they are largely faith-based, predicated on the idea that their current scope is sufficiently analogous to their previous work to generate an informed guess. Note also that most risk managers will insist that the risk analysis should continue throughout the projects’ life-cycle. Since alternatives that could impact the project are consistently popping up, this is not surprising; but it does point to a specific lack of finality that’s absent from the projects’ baselines. Scope, Cost, and Schedule, at some point, are all “frozen,” or, to one degree or another, contractually binding. Not risk, no siree. It’s almost as if contemporary risk analysis is more about dealing with an unquantifiable future than it is about processing actual data into usable information, the latter being an instantly recognizable aspect of management science, the former more in line with, oh, I don’t know, faith?

As long as I’ve gone this far, I may as well state the obvious conclusion: any system of beliefs that is largely faith-based is NOT management science, and far more closely resembles a religion. I’ve been hearing the faith-based message of the risk managers for decades now, and I’m more than a little sick of it. I’m ready for this service to end.

[i] Merriam-Webster on-line, http://www.merriam-webster.com/dictionary/faith, retrieved August 13, 2016, 14:18 MDT.

Hatfield’s Uncontestable Management Theory #9 is that any notion that can’t be clearly articulated, both as to what it is as well as what it is not, cannot be taken seriously, or even legitimately evaluated. An old business axiom (not one of mine) is that which cannot be measured cannot be managed; similarly, inchoate ideas aren’t even weak hypotheses, much less usable management science.

Which brings us back to our friends, the risk managers, and their ongoing assault on the English language. Last week I took them to task over this whole risk-equals-opportunity nonsense, but that at least had the characteristics of simply trying to manipulate the language in order to support an otherwise silly notion. What I wish to address next represents a full frontal assault.

A principal aspect of risk analysis theory (strikethrough) suspect assumptions is that future events can be categorized as either “known unknowns” or “unknown unknowns.”  I can’t help but to wonder what the person(s) who came up with this nomenclature was thinking, since these categories are anything but intuitively obvious. The future is unknown, and unknowable by mere mortals. Ah, but the whole risk management facade comes crashing down in a heckuva hurry if this fact becomes widely accepted. They, therefore, come up with these two categories, which, like the risk/opportunity conflation, are self-evidently contrary, attempts to bully those who know the plain meaning of the terms notwithstanding.

Which brings us back to the marginal concept of “unknown unknowns.” What are these? It’s not overly cynical to say that these are events that the risk analysts did not anticipate, and therefore couldn’t estimate odds of occurrence nor cost/schedule impact. Pretty nifty, no?, to be able to completely mis-judge a management situation, and pass off the failure by categorizing it as an “unknown unknown.”

Then we have the issue of the repetitive-contrary-term phrase. The prefix “un,” in the English language, means “not.” By definition, a thing cannot be both “N” and “not N,” any more than something can be both “known” and “unknown.” The very fact that risk managers would attempt such linguistic legerdemain is itself, stark evidence for the poorly-thought-out nature of their ideas. As for this phrase’s cousin, it’s simply repetitive. The future is unknown. Saying that a specific future occurrence is “unknown unknown” is sophomoric repetition; it’s unknown – that’s all that needs to be said about it.

Imagine a project to paint a house blue. As the PM sends his assistant to purchase the selected paint, he finishes erecting the scaffolding and is approached by his risk manager.

“I want to talk to you about your project’s scope, and risk registry” he begins.

“Umm, okay, whaddaya got?”

“Based on previous projects’ performance, I think you should prepare for the chance that you won’t paint this house blue.”

“Why not?”

“Because your previous projects were to paint houses different colors, meaning that we should prepare for the outcome here to be either blue un-blue, or un-blue un-blue.”

“What’s ‘blue un-blue’?”

“More like a green.”

“That’s not blue.”

“It is if you mix it with yellow. That’s why I called it ‘blue un-blue.’”

“But my assistant has the exact color formula.”

“Then there are the un-blue un-blues, such as red.”

“We’re not going to paint the house red.”

“But you have to prepare for the chance of that happening!”

“It won’t ‘happen.’ If my assistant comes back with the wrong color – any shade of ‘un-blue,’ – I will send him back to get the right color.”

“But we should plan for the cost or delays associated with that happening.”

“No, we shouldn’t. How much am I paying you, again?”

And our PM didn’t even ask about the odds of painting the house un-blue un-blue.

One of the easiest aspects of modern risk management theory to blast to smithereens is their excessively irksome notion that risk management somehow includes opportunity management. (“How easy” you ask? Similar to betting on the Sun rising in the East tomorrow.) The evidence for such an assertion is non-existent. For example, consider the Oxford English Dictionary definition of “risk”:

• noun 1 a situation involving exposure to danger. 2 the possibility that something unpleasant will happen. 3 a person or thing causing a risk or regarded in relation to risk: a fire risk.
• verb 1 expose to danger or loss. 2 act in such a way as to incur the risk of. 3 incur risk by engaging in (an action).
• PHRASES at one’s (own) risk taking responsibility for one’s own safety or possession. Run (or take) a risk (or risks) act in such a way as to expose oneself to danger.

Anybody see anything in there that represents a favorable time or set of circumstances for doing something?  Now let’s take a look at the definition of “opportunity”:

• noun (pl. opportunities) 1 a favourable time or set of circumstances for doing something. 2 a career opening: job opportunities.

Anybody see anything here that even remotely implies exposure to danger? Me neither.

In order to further the assertion that risk and opportunity are similar, a premise that is self-evidently false, the argument must morph in to “Are opportunity management analysis techniques similar to risk analysis techniques?” Again, the answer is “no.” While they both have in common an attempt to quantify an unknowable future, they differ is what is unknown about that future. For example, risk responses include:

• mitigation
• deflection
• contingency

And yet no one refers to mitigating opportunity, deflecting opportunity, or preparing a contingency in the event an opportunity presents itself, much less the odds of an opportunity arising. Nominally, opportunity is managed using tools such as the SWOT analysis; yet even here the opposite nature of risk and opportunity is clear.  Just as Strengths are assessed as opposites of Weaknesses, so too Opportunities are captured as the opposing piece to Threats, or risks.

What’s actually going on when the risk management aficionados assert an equivalency between such opposite terms is that they need to have an entity other than dictionary publishers push their poorly-developed ideas, since the notion that risk and opportunity management are closely related is self-evidently false. However, since the risk managers consistently claim to be able to, in some capacity, quantify the future, then it simply wouldn’t do to only capture the bad stuff. In order to support such a statement, they have to be able to foresee the good possibilities as well; otherwise their techniques will be even more representative of highly questionable management science hypotheses than they are already.

As I have oft stated in this blog, the future cannot be quantified with any precision, positive nor negative, opportunity nor risk. Doubling down on the very idea that they can do so by attempting to force a re-definition of these common phrases (“opportunity” has been around since the 14^th century, and “risk” since around 1661[i] -- and about that: how can opportunity be part of risk if “opportunity” was around for more than 200 years prior to “risk”?) can hardly be called advancing the cause of management science.

In fact, that particular tactic more closely resembles something a person who was trying to deceive, rather than illuminate, would attempt.

[i] Definitions of Risk and Opportunity, Merriam-Webster Online, retrieved from http://www.merriam-webster.com/dictionary/risk on 1 August 2016, at 18:53 MDT.

Okay, maybe “die” is a bit strong. But consider: prior to the Ming Dynasty ((1368-1644), China was a technologically advanced and expanding world power. However, once Hong Wu founded the Ming Dynasty, China became a (relatively) closed society. Both trade and diplomatic ties were abruptly curtailed or halted altogether, and the Great Wall was completed in the North, symbolically (if not actually) sealing off China along hundreds of miles. By the time the Qing Dynasty began (1644), the West had attained marked superiority in military, economic, and agricultural technology. Ironically, anti-foreigner sentiments would linger for decades – the Boxer Rebellion (1900), for example, saw hundreds of foreigners killed[i].

Similarly, under the Tokugawa Shogunate, Japan entered into a 220-year long period of isolation, changed only when Commodore Perry returned to Japan in 1854. Prior to this period of isolation (“Sakoku”[ii]), Japan was relatively advanced in its economics and military technology. But by 1854, with trains commonplace in the West, a gift locomotive from Perry created astonishment among the Japanese people who saw it for the first time.

There are many other examples, but these two illustrate dramatically the dangers of organizations – not just nation-states – that attempt to create a narrative or environment where outside or alien ideas or concepts are dissuaded or prevented from being adapted. I believe this effect is scalable. Not only can isolationism dramatically affect entire societies (usually for the worse), the same effect can occur on an individual basis. As I have discussed in this blog previously, arrogance is not just off-putting on an interpersonal level – it prevents the person so afflicted from readily evaluating or adapting ideas brought to them by others. The more humble, then, are in a far better position to take advantage of new, novel solutions to problems that the arrogant one won’t even recognize.

In-between nation-states and individuals, we have corporations and project teams. How amenable are these to recognizing and adopting new ideas, versus holding tightly to a narrative that they have all the answers going in, and are therefore insulated to the outside realm of ideas? And what are some of the indicators that the specific corporation or project team is leaning towards one side of this scale, or the other?

Indicator number one is easy: it’s ProjectManagement.com’s July theme of outsourcing. Project teams especially are composed of people from several (if not many) different disciplines. The larger project teams will almost always include some subcontractors, and it is not at all unusual for very large project teams to include personal combined from companies that would otherwise be rivals. Beware, therefore, the large project team composed entirely of people from one organization. Such teams are almost certainly allowing business model pathologies to change the optimal approach to completing the project’s scope on-time, on-budget. A sub-level clue of this effect occurs when there is a notable, yet artificial, hierarchy among the members of the project team based on their membership in the various organizations within said team.

Indicator number two is a bit more difficult to ascertain, but is a dead giveaway nevertheless. It’s cronyism/nepotism. These two very similar business model pathologies are clear indicators that the organization that is indulging them has walked away from (if not abandoned altogether) a merit-based structure for evaluating and placing talented personnel in their most appropriate roles on the project team. In a way, cronyism is the anti-outsourcing alternative. Instead of giving work to those outside the home organization because the recipients can do the job better, faster, or cheaper, the organization instead gives the work to the recipient simply because they are internally favored, with little or no true consideration of performance.

Finally, if you, yourself, are not an M.D., and you don’t outsource your own medical care, you will, in all probability, die sooner than you would otherwise. So this blog’s title isn’t really all that outlandish after all.

[i] Retrieved from History of China, http://www.chaos.umd.edu/history/toc.html, on July 23, 2016.

[ii] Sakoku. (2016, July 5). In Wikipedia, The Free Encyclopedia. Retrieved 20:06, July 23, 2016, from https://en.wikipedia.org/w/index.php?title=Sakoku&oldid=728508502

It was another dark and stormy night. I was staring at the stencil across my frosted glass office door, eyE etavirP, yrrebpsaR .t yelnatS. My secretary, Anne, had just left, saying “Good night, sleep tight, and if you don’t pay me tomorrow I’m going to kick your &^%,” when the phone rang.

“Stanley? It’s Deborah. You’d better get down here.”

Deborah was my inside source from Monolithic Corporation.

“Why, what’s going on?”

“The big wigs are bringing in some politicians, so it has to be hot.”

“How can I get in?”

“Disguise yourself as one of the custodians.”

“Don’t they need badges, too?”

“Yeah, but the guards never look at them. For some reason, Monolithic treats its cleaning staff rather poorly.”

“Most poorly-run organizations do. Okay, I’m on my way.”

With my cap pulled down low and wearing coveralls, I pushed a trash bin cart straight past the guards. Deborah was right – they barely glanced my way. I headed towards the hall where Deborah’s office was. Just a few feet away, I heard a guttural voice behind me.

“Raspberry! Dang it! You come here!”

I froze in place.

“Yeah, I’m talking to you. Come here!”

I slowly turned, still keeping my gaze low.

“How can I help, sir?”

“Somebody spilled some raspberry preserves in this break room, and if you know what’s good for you, you’ll clean it up RIGHT NOW!”

“Just let me fetch my stain remover, and I’ll get right on it, sir.”

The Monolithic manager huffed off just as Deborah opened her office door and beckoned me inside.

“Get to room 54B; it’s in the basement right next to the Hatfield Conference room.”

“The what conference room?”

“It was named after an obscure ProjectManagement.com blogger. Behind the velvet painting of Elvis there’s a peep hole you can use to listen in.”

As I shuffled in to basement room 54B, I could hear an animated discussion already going on. I closed the door, and pushed the velvet Elvis painting aside, and listened.

Voice #1 (guttural, so I assumed it was Monolithic’s president): “So, as you legislators can see, we don’t outsource anything we don’t have to, meaning more dollars stay here in this country.”

Voice #2 (a bit more earnest, so I assume it was one of the legislators): “But is that the most economical approach? If you were to outsource some of your parts or services, wouldn’t that reduce the costs on your government contracts, and then the taxpayer?”

Voice #1: “That’s not what we’re here to talk about. I want you three to introduce and push legislation that grants preferred status to companies like Monolithic that refuse to outsource, no matter the increased costs.”

Voice #3 (not guttural, but more experienced sounding than the first legislator to respond): “And why would we do that?”

Voice #1: “Two reasons: one, by pushing the preferred-no-outsourcing narrative, you can appear to be patriotic, since the funds stay in this country. Two, if you don’t, not only will we stop contributing to your campaigns, we will start supporting your opponents.”

Voice #2: “That sounds like a threat.”

At this point what I heard sounded like someone had told a really funny joke at a Darth Vader imitators’ convention.

Voice #1: “I’m not threatening. That would be un-American!”

Another very funny joke at a Darth Vader imitators’ convention.

Voice #2: “What about the intellectual forces against that meme, people like Stanley Raspberry?”

Voice #4 (guttural, but younger): “Raspberry? He’s been a pain in our…”

Here I heard a sound like a yardstick being slammed onto knuckles.

Voice #1: “Raspberry and his ilk are nothing to us. If you’re smart, you will do as we say.”

Voice #4: “I don’t get it. If your company is so big and successful, why do you need any kind of help from the government?”

Voice #1: “It’s not about our expenses. It’s about making harder for smaller competitors, who, as you know, could easily undercut us by outsourcing. Customers would flock to them in droves, so we just need you to demagogue this issue, so that people will continue to be mislead about outsourcing.”

Just then I heard the doorknob turn. I let the painting down, and began emptying the trash can as a Monolithic executive walked in.

“Get out of here, custodian!” he growled.

Deborah called me once I had returned to my office, and I gave her the lowdown on what Monolithic was up to.

“What are you going to do about it?” she asked.

“What I always do – counsel my clients to make the best decisions for them, which includes outsourcing, and watch them steadily erode Monolithic’s market share – right after I clean my office.”