Project Management

Voices on Project Management

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Voices on Project Management offers insights, tips, advice and personal stories from project managers in different regions and industries. The goal is to get you thinking, and spark a discussion. So, if you read something that you agree with--or even disagree with--leave a comment.

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Making Decisions Means Taking Risks

Categories: Probability, Risk

By Lynda Bourne

Every decision involves making a choice between alternatives, with the project leader picking from a number of options. This selection is influenced by information (albeit sometimes insufficient) and preferences rooted in values and ethics. In these circumstances, the modern trend of risk-based decision-making can be seen as a tautology: Every decision involves uncertainty and therefore incorporates an element of risk.

The worst option is to delay a decision until all of the necessary information is available—and, as a consequence, all of the opportunities have evaporated. So how do you make good decisions? The starting point is to accept there will be uncertainty in all true decisions—and the outcome matters. You have to choose between different options while navigating any number of obstacles ahead of you: incomplete information to support the decision, no clear best path and unknown outcomes of some options. The challenge is to make the best decision in the available timeframe balancing risk and reward. No process can guarantee a good outcome every time, but working through a pragmatic process can help improve outcomes.

Your decision-making process needs to:

  • Define the objectives or outcomes you seek. This frames why you need make this decision and what success may look like.
  • Consider the risk of each of the alternatives is by assessing the level of uncertainty and the nature of the possible outcomes. Educated guesses are okay.
  • Rank the options based on the level of risk exposure and the probability of achieving the required objectives. A weighted decision-making matrix may help, but remember to keep costs and benefits in mind a well.
  • Make the decision and move on to implementation.

Getting the weighting right is central to this approach. In some situations, particularly when safety is involved, dull, safe but expensive may be the best choice, particularly if the cost is not particularly significant in the overall project budget. Think about investing in the security layer for any on-line finance or ordering system, for example. In other situations where failure is only going to cause some embarrassment, innovative but risky solutions may be better, particularly if the cost is low. Case in point: No one can predict when a website will become ultra-successful (go viral), but you won’t be successful if you don’t try. Investing US$10,000 in an option that has a 10 percent chance of making US$1 million is a good investment (but prudent managers have plan B ready to roll).

There’s no way to ensure the best decision is made, and often no way of knowing if the decision you’ve taken was the best—you cannot re-run history. But you can measure bad outcomes; the worst decision is no decision. The next-worse option is a late decision. This always costs a lot of money and may result in opportunities being missed. And the next worse option after that are timely decisions based on a wrong premise—usually out of trying to avoid all risk.

If you avoid those pitfalls, you’re likely to be making a well-founded decision. This is the realm of competent managers. But you’ll also need luck on your side to be seen as making a “really good” decision. And for that, you make your own luck, to quote author Ernest Hemmingway. Deciding to make effective decisions is a choice you need to make.

What does your decision-making process look like?

Posted by Lynda Bourne on: March 15, 2021 05:44 PM | Permalink | Comments (8)

Probability vs. Luck: Lessons Learned From a Day at the Races

Categories: Probability, Risk

By Lynda Bourne

Last November, my partner and I spent a lovely day in the country attending the Dunkeld Cup at Mt. Abrupt in Victoria, Australia. The location is very picturesque, and we had a thoroughly enjoyable day. To add to the pleasures of wining and dining, my partner developed a “foolproof method” that allowed him to pick five winners and a placegetter (among the top three) out of seven races with a total of eight bets.

So, should he give up his day job to exploit this newly discovered skill?

The Dunkeld Racecourse with The Grampians Mountains behind.

The horses he chose were not random picks: My partner used a selection method based on a guide that rated horses on their form from 0 to 100. Using a portfolio management approach, he first recognized that the difference between a 97 or 98 rating and a rating of 100 was too small to matter. Every assessment process has a range of error, and a difference of 2 to 3 percent is likely to be well within this range. This approach reduced the panel of potential winners to three or four horses in each race.

The second step in the selection process was to look at the variables. The form guide is printed well before race day, and it had recently rained. A soft track would benefit horses carrying a lighter weight. So out of the prospective panel, we placed our bets on the horse with the lowest weight.

Voilà! Six winners in seven races—a winning formula that would allow us to retire from managing projects and make our fortunes as professional punters … But not so fast.

The probability of repeating a six out of seven winning ratio in the future is very low. How much of our big day boiled down to effective process—and how much was pure dumb luck? That is a risk management question.

Step One: Consider the Probability: The first consideration is how likely was it that someone would pick six out of seven winners? There were several thousand people at the race, and it is highly probable, simply based on random chance, that someone would have a “winning streak” and back six winners using their own system. On this basis, there is a several-thousand-to-one chance of a repeat outcome. Someone will have a similar winning streak in 2020, but probably not us. There is a strong tendency for winners to ascribe the results of random chance to their skill. But pragmatic managers look deeper.

Step Two: Assess All Available Data (Not Just the Highlights): We placed eight bets: Five came in first, one finished third and the other two were placed sixth and seventh, respectively. All we can say for sure is we were likely to select horses that would finish between seventh and first. But as there can only be one winner and two placegetters, horses finishing fourth, fifth, sixth and seventh mean a lost bet. The median position is 3.5—which also means a lost bet. The mean is 2.6, so we may have been slightly in front, but “place bets” do not pay much. Adding in the range options, no horse can do better than first place, but there are many more places between seventh and last. Factor this in, and the margin of success in our small sample becomes doubtful.

So, what are the lessons learned from our day in the country? My take is that good processes help build success—but you should not confuse luck with skill. When Napoleon Bonaparte was criticized for winning battles simply because of luck, he famously retorted: “I’d rather have lucky generals than good ones.” I think we were just lucky.

We may well return to the Dunkeld Cup in 2020. It’s a great day out, and more data is needed to round out this research. In the meantime, applying simple probability analysis to my partner’s winning methodology suggests he needs to keep his day job. That’s a safe bet.

Posted by Lynda Bourne on: March 20, 2020 04:28 PM | Permalink | Comments (4)
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