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Loss Aversion bias and Project Management
Hi

After reading in a blog about Daniel Kahneman's book "Thinking, Fast and Slow", the examples of tests on people prefering not to loose instead of trying to gain, and investigating a bit about Loss Aversion Bias I got curious.

I was wondering how many decisions we make in project management influenced by this bias and the effects it has in the Project outcomes... Things like risks that have become certainties, terminating severely underperforming contracts (either company or personal level, proposing to cancel a project where the business justification doesn't make sense anymore...

Ever felt biased by this? Do you know of different cases and clever ways of dealing with this?

Share your experiences :)
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Yes, true, Joao.

Loss aversion bias is something I fall to, like being persistent, stubborn and having a 'never give up' attitude. I try to be aware of it though, as of the many other biases.

As project managers, we use the 'sunk cost' principle to counter the bias, if we re-assess a project. Nevertheless, the 'watermelon' symptom (inner side red, outer side green, inbetween amber) shows how (project) managers try to hide problems and are not asking for help. Then regularly a downward spiral cannot be stopped. Maybe this a reason why we still have so many troubled projects.
Another reason is that still the messenger is shot too often: if I kill my own project I am not considered a hero but a looser in too many organizations.

As portfolio managers, we tend to kill too few projects due to that bias too. I like the portfolio mgmt KPI of %killed projects. If it is zero or close to, compared to 70% or so challenged projects we clearly have a gap here.

For me the main takeaway from Kahnemann is that by far most decisions are made not consciously but by our gut feelings. This is a direct hit against the common belief of data driven decision making. Who would by a Porsche or Rolex based on data and rational thought?

So it is important to be able to read our feelings and initiate our ratio if it is important (which corresponds to the first two elements of emotional intelligence, self-awareness and self-control). Also be aware, that rational thinking requires lots of energy and we exhaust easily. So we should make decisions with potential big impact when we are fresh and full of energy, in the morning.
...
1 reply by Joao Sarmento
Feb 05, 2020 2:46 PM
Joao Sarmento
...
Hi Thomas,

Wow!!! Loved the way you explored this. Extremely insightful, many great examples, lots of wisdom nuggets to take with you.

As Michelangelo said: "Every block of stone has a statue inside it and it is the task of the sculptor to discover it."

Thank you for sharing this!
Dear John
Interesting your question
Thanks for sharing

"I have not failed. I've just found 10,000 ways that won't work" - Thomas A. Edison

If we look at the numbers related to successful projects we can draw some conclusions about this topic
...
1 reply by Joao Sarmento
Feb 05, 2020 2:50 PM
Joao Sarmento
...
Hi Luís,

Love that Thomas Alva Edison quote!

Indeed, looking at the numbers, we start thinking that we should kill projects much sooner or make hard decisions way earlier to get better results...

In Jim Rohn's words, "Everyone must choose between two pains: pain of discipline or pain of regret"!

Thanks for sharing your thoughts!

Regards,
Worth considering there is an aspect of fear when looking at one's project management practices and execution. Certainly, there is a bias when performing risk analysis exercises, but what about when looking at our projects and/or practice as a whole?
...
1 reply by Joao Sarmento
Feb 05, 2020 3:04 PM
Joao Sarmento
...
Hi Andrew,

Nice of you to add fear onto our discussion, since it plays a very important role in our biases...

I believe on might recall Master Yoda's famous quote:
"Fear is the path to the dark side. Fear leads to anger. Anger leads to hate. Hate leads to suffering."

Thanks for sharing your inputs!
I agree with Thomas
...
1 reply by Joao Sarmento
Feb 05, 2020 3:05 PM
Joao Sarmento
...
Hi Abolfazi,

I agree with him too.
He puts it very well :)

Thanks!
I think we also need to consider the level of this bias which our stakeholders possess. Like risk appetite, loss aversion bias will color how stakeholders will evaluate key decisions and could end up in a situation where the organization achieves mediocre returns on its investments due to playing it too "safe".

One example of this is the "Ruinous Empathy" quadrant of Kim Scott's Radical Candor model where an individual avoids providing constructive feedback directly to someone because of the fear of the short term loss both might incur.

Kiron
...
1 reply by Joao Sarmento
Feb 05, 2020 4:31 PM
Joao Sarmento
...
HI Kiron,

Definitely is something to take into consideration, specially if we see those first signs of "playing it too safe". I believe that in some projects we could map it. Should we "assess"/"measure" it as we do risk appetite?

Recalling Radical Candor's ruinous empathy quadrant reminds me of Frederick Douglass' words "it is easier to build strong children than to repair broken men".

When we have the possibility we should pick for our teams and corporations, and invest in building strong "children".

Thanks for your inputs and excellent examples!
Jan 27, 2020 3:27 AM
Replying to Thomas Walenta
...
Yes, true, Joao.

Loss aversion bias is something I fall to, like being persistent, stubborn and having a 'never give up' attitude. I try to be aware of it though, as of the many other biases.

As project managers, we use the 'sunk cost' principle to counter the bias, if we re-assess a project. Nevertheless, the 'watermelon' symptom (inner side red, outer side green, inbetween amber) shows how (project) managers try to hide problems and are not asking for help. Then regularly a downward spiral cannot be stopped. Maybe this a reason why we still have so many troubled projects.
Another reason is that still the messenger is shot too often: if I kill my own project I am not considered a hero but a looser in too many organizations.

As portfolio managers, we tend to kill too few projects due to that bias too. I like the portfolio mgmt KPI of %killed projects. If it is zero or close to, compared to 70% or so challenged projects we clearly have a gap here.

For me the main takeaway from Kahnemann is that by far most decisions are made not consciously but by our gut feelings. This is a direct hit against the common belief of data driven decision making. Who would by a Porsche or Rolex based on data and rational thought?

So it is important to be able to read our feelings and initiate our ratio if it is important (which corresponds to the first two elements of emotional intelligence, self-awareness and self-control). Also be aware, that rational thinking requires lots of energy and we exhaust easily. So we should make decisions with potential big impact when we are fresh and full of energy, in the morning.
Hi Thomas,

Wow!!! Loved the way you explored this. Extremely insightful, many great examples, lots of wisdom nuggets to take with you.

As Michelangelo said: "Every block of stone has a statue inside it and it is the task of the sculptor to discover it."

Thank you for sharing this!
Jan 27, 2020 4:29 AM
Replying to Luis Branco
...
Dear John
Interesting your question
Thanks for sharing

"I have not failed. I've just found 10,000 ways that won't work" - Thomas A. Edison

If we look at the numbers related to successful projects we can draw some conclusions about this topic
Hi Luís,

Love that Thomas Alva Edison quote!

Indeed, looking at the numbers, we start thinking that we should kill projects much sooner or make hard decisions way earlier to get better results...

In Jim Rohn's words, "Everyone must choose between two pains: pain of discipline or pain of regret"!

Thanks for sharing your thoughts!

Regards,
Jan 27, 2020 7:16 AM
Replying to Andrew Craig
...
Worth considering there is an aspect of fear when looking at one's project management practices and execution. Certainly, there is a bias when performing risk analysis exercises, but what about when looking at our projects and/or practice as a whole?
Hi Andrew,

Nice of you to add fear onto our discussion, since it plays a very important role in our biases...

I believe on might recall Master Yoda's famous quote:
"Fear is the path to the dark side. Fear leads to anger. Anger leads to hate. Hate leads to suffering."

Thanks for sharing your inputs!
Jan 27, 2020 8:19 AM
Replying to Abolfazl Yousefi Darestani
...
I agree with Thomas
Hi Abolfazi,

I agree with him too.
He puts it very well :)

Thanks!
Jan 27, 2020 8:11 PM
Replying to Kiron Bondale
...
I think we also need to consider the level of this bias which our stakeholders possess. Like risk appetite, loss aversion bias will color how stakeholders will evaluate key decisions and could end up in a situation where the organization achieves mediocre returns on its investments due to playing it too "safe".

One example of this is the "Ruinous Empathy" quadrant of Kim Scott's Radical Candor model where an individual avoids providing constructive feedback directly to someone because of the fear of the short term loss both might incur.

Kiron
HI Kiron,

Definitely is something to take into consideration, specially if we see those first signs of "playing it too safe". I believe that in some projects we could map it. Should we "assess"/"measure" it as we do risk appetite?

Recalling Radical Candor's ruinous empathy quadrant reminds me of Frederick Douglass' words "it is easier to build strong children than to repair broken men".

When we have the possibility we should pick for our teams and corporations, and invest in building strong "children".

Thanks for your inputs and excellent examples!

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