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Project Decisions

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Project management is the art of making the right decisions. To be effective as a project manager, you must know how to make rational choices in project management, what processes can help you to improve these choices, and what tools are available to help you through the decision-making process. Project Decisions: The Art and Science is an entertaining and easy-to-read guide to a structured project decision analysis process. This valuable text presents the basics of cognitive psychology and quantitative analysis methods to help project managers make better decisions. Examples that portray different projects, real-life stories, and popular culture will help readers acquire the essential knowledge and skills required for effective project decision-making.

Readers will be able to:
•Understand psychological pitfalls related to project management
•Establish a creative business environment in their organization
•Identify project risks and uncertainties
•Develop estimates of project time and cost based on an understanding of human psychology
•Perform basic quantitative and qualitative risk and decision analysis
•Use event chain methodology in managing projects
•Communicate the results of decision analysis to decision-makers
•Review project decisions and perform adaptive project management
•Establish a project decision analysis process in their organization

PLUS — Test your own judgment through a quiz that examines your intuition!

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CHAPTER 1: Project Decision Analysis: What Is It?

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Most of us believe we are pretty good at making decisions, yet we continue to make poor ones. And over time our poor decisions become a burden that we impose on each other, especially when the decisions we make as managers are connected to large-scale projects that affect many people. The process known as structured decision analysis—which is described in detail in this book—can improve our ability to make better decisions, particularly in project management, where the decisions can be complex. Indeed, today many organizations in both the public and private sectors use decision analysis to solve their project management problems.

In 2004—2005, Governor Arnold Schwarzenegger of California was involved in a complex decision-making process. He was not considering a role for his next action movie, nor was he selecting a new energy weapon to blast villains in a sci-fi movie. This was something more serious: the governor involved himself in the design process for a new bridge in San Francisco (Cabanatuan 2005).

 

CHAPTER 2: “Gut Feel” vs. Decision Analysis: Introduction to the Psychology of Project Decision-Making

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“The purpose of psychology is to give us a completely different idea of the things we know best.”

—PAUL VALERY, FRENCH POET (1871–1945)

The root cause of almost all project failures is human error or misjudgment. These errors are hard to prevent, for they stem from human psychology. But decision-making is a skill that can be improved by training. By understanding how psychological heuristics and biases can affect our judgment, it is possible to mitigate their negative effects and make better decisions.

In his paper “Lessons Discovered but Seldom Learned or Why Am I Doing This if No One Listens” (Hall 2005), David C. Hall reviewed a number of projects that had failed or had major problems. Among them were:

Malfunctions in bank accounting software systems, which cost millions of dollars

Space programs, including the Mars Polar Lander, Mars Climate Orbiter, and Ariane 5 European Space Launcher, that were lost

Defense systems, including the Patriot Missile Radar system and Tomahawk/LASM/Naval Fires Control System, which had serious problems.

 

CHAPTER 3: Understanding the Decision Analysis Process

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The Americans will always do the right thing … after they’ve exhausted all alternatives.

—WINSTON CHURCHILL

We want to make rational choices, we would like a transparent decision-making process, and we want a mechanism for correcting mistakes. These goals can be accomplished through the decision analysis process: decision framing, modeling, quantitative analysis and implementation, and monitoring and reviewing of decisions. Decision analysis is simple and adaptable to different types of project decisions.

An example of applying decision analysis to a complex project can be seen at the National Aeronautics and Space Administration (NASA). The U.S. Congress mandated that NASA be more accountable when it evaluates its advanced technology projects. As a public agency, NASA is concerned about maximizing the value it gets from its expenditures and cost reduction. But taking risks is inherent in all space exploration, so eliminating risk would mean eliminating NASA’s very purpose. (From another perspective, what do you think was the primary objective of the Wright brothers—maintaining a healthy net present value or getting an airplane to fly?) To manage its inherent risk, many NASA divisions have started applying decision analysis methods to improve their ability to select courses of action.

 

CHAPTER 4: What Is Rational Choice? A Brief Introduction to Decision Theory

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Different organizations and individuals use different preferences and principles to select policy alternatives. We call those preferences and principles an organization’s “decision policy.” An important part of an organization’s decision policy is its attitude toward risk.

In this chapter we look at what it means to make rational decisions. We examine the concept of expected value and the normative expected utility theory, which provides a set of axioms, or rules, for how rational decisions should be made. Finally, we look at prospect theory, which is a descriptive approach to understanding decision-making.

Decision policy is the set of principles or preferences that an organization uses when selecting its policy alternatives. The organization’s attitude toward risk is a key component of its decision policy.

The art and science of decision-making is applying decision policy to make rational choices.

A decision policy reflects the attitude of an organization toward its objectives. The policy is a function of many parameters, such as client requirements, corporate culture, organizational structure, and investor relationships. In most cases, decision policies are not written; they an unwritten understanding that evolves over time with organizational changes, and they are understood by the managers. However, even though decision policies are usually an informal understanding, they are very difficult to change, even if directed by executive management.

 

CHAPTER 5: Creativity in Project Management

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Creativity is the power to connect the seemingly unconnected.

—WILLIAM PLOMER, SOUTH AFRICAN AUTHOR (1903–1973)

Creativity is an essential component of successful project management. Psychologists have developed different theories explaining the process of creative thinking. Our ability to come up with creative solutions can be constrained due to creativity blocks, such as stereotyping, inability to see problems from another perspective, or fear of the “far out” alternative. Cultural and organizational blocks such as those related to corporate culture can significantly constrain the creative process in project management.

This book is about decision analysis processes, which we believe will help you make better project decisions. But where does creativity fit in? Does decision analysis prevent the discovery of original, nonstandard solutions or the selection of creative alternatives?

Creativity is related not only to technological innovations but also to the way we manage projects. Consider these problems:

 

CHAPTER 6: Group Judgment and Decisions

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Group judgments can be different from individual judgments. Although the basic heuristics and biases that apply to individuals also apply at the group level, a number of biases are specific to groups. Group discussions such as brainstorming may lead to better decisions than if they were made by individuals. Game theory is a mathematical theory of human behavior in competitive situations, such as project management, in which players interact.

Project managers do not operate in a vacuum, and important decisions in project management are rarely made individually. They usually involve a number of people and are the result of discussions between different stakeholders. For example, project managers collaborate with project team members and communicate with clients to develop a balanced project plan.

If decisions are made in groups, are they subject to the same mental errors as those made by individuals? For example, do heuristics such as availability and representativeness, which we discussed in relation to individuals in Chapter 2, work at a group level? Simply put, the answer is yes, individual heuristics and biases continue to operate at a group level. Moreover, these biases can be even stronger in groups than in individuals (Plous 1993). For example, when estimating the duration of an activity, you, working alone, may use a certain number as a reference point or anchor (say, four days) and then come up with the range of durations using a reference point of between three and five days (Figure 6.1). This bias results from the anchoring heuristic (which we discussed in Chapter 2). A group may use the same reference point (four days) but come up with a wider range (between two and six days).

 

CHAPTER 7: Are You Allowed to Make a Decision? Or the “Frustrated Developer’s Syndrome”

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Our ability to make and implement project decisions depends on our professional environment, in particular the corporate culture in which we work. In many organizations, project teams are unable to contribute to major decisions and are not properly rewarded for making good choices. This significantly undermines the productivity and quality of an organization’s projects. We call this effect the frustrated developer’s syndrome, or FDS, a dangerous disease affecting corporate culture. It is hard to treat FDS, mostly because senior management tends to recognize the problem only when it is very advanced.

After reading this book, you may become an expert in project decision-making, but will you be allowed to apply your newfound expertise? Will your organization allow you to make a decision or at least heed your advice? In other words, will your manager continue to make decisions for you and your team, leaving you with only one choice: implement the project plan even if you disagree with it?

 

CHAPTER 8: Identifying Problems and Assessing Situations

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The decision analysis process involves a number of participants. Among them are decision-makers, decision committees or review boards, subject matter experts, and decision analysts. Assessing a business situation involves collecting and analyzing data relevant to the decision. Tools are available to help identify problems and assess business situations.

Before we start our review of decision-framing, the first phase of the decision analysis process, let’s discover who the players are. Each type of movie has its standard set of characters. For example, spy movies have:

Heroes, who manage projects that are not possible for us ordinary humans (as do most project managers)

The villain, whose first small project is to destroy the galaxy; he may have the means to do it, but is not sure why (as occurs with many project sponsors)

The heroes’ girlfriends, who are among the heroes’ project stakeholders; however, they may be completely unaware of their stake in the project (as is common with many project stakeholders)

 

CHAPTER 9: Defining Project Objectives

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A project can have several objectives and therefore a number of decision-making criteria. To select a viable alternative, decision-makers have to make a number of tradeoffs. Aligning objectives is important to be able to achieve project goals. Project objectives and tradeoffs can be determined by defining a hierarchy of fundamental objectives or a network of means objectives.

Sgt. Bilko was a hilarious movie (starring Steve Martin) and a long-running TV series (starring Phil Silvers). While on active duty in the U.S. Army, Bilko was involved in a number of operational and project-related activities (actually, they were more like escapades), including gambling, organizing of sport competitions, renting out military vehicles, and even planning for a day care center in the military barracks. Clearly, Bilko had different objectives than his employer, the U.S. Army. In the movie, one of the main objectives of the military unit at Fort Baxter was designing and developing a hover tank, not advancing Bilko’s fortunes.

 

CHAPTER 10: Generating Alternatives and Identifying Risks

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We can use several techniques to identify risks and generate alternatives: documentation reviews, information-gathering techniques (Delphi, SWOT, and others), assumption analysis, and various diagramming processes. Risk templates can be useful in the risk-identification process. Risk-response planning helps determine the course of action if a risk occurs. Risk registers help monitor and manage risks during the course of a project.

Almost everything in a project is uncertain. There is no certainty that you will still be the project manager in two weeks. Today you are a project manager; maybe tomorrow you will win $10 million in a lottery and retire to Palm Beach. (So don’t get too comfortable.) Before you start a project, you need to determine the potential uncertainties, identify the risk events that may affect the project, and generate alternative project scenarios. Various uncertainties can affect a project schedule, including:

Duration and cost of activities

Lags between tasks

 

CHAPTER 11: The Psychology and Politics of Estimating

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There are three sources of estimation errors: political, psychological, and technical (process-related). Politics plays a large role in such errors because corporate planners often intentionally make unrealistic estimations to get their projects approved. Optimism bias, planning fallacy, the rule of Pi, and other cognitive biases also affect estimates. A number of simple techniques can improve estimations: avoid making wild guesses, do reality checks, collect relevant historical data, and perform independent assessments.

We have now come to one of the most important topics in project decision analysis and project management: estimations. How many books have been written on the subject, how many consultants make a good living at it, how many estimation software packages have we bought (and still are not using)? Still we cannot deliver accurate project estimates.

In essence, estimates are forecasts of the future; unfortunately, we are not very good at forecasting. It is difficult to make forecasts of natural phenomena like the weather; it is even harder to make forecasts of any processes that involve people, who come with certain knowledge, behaviors, and biases. Project management is one of these processes.

 

CHAPTER 12: Project Valuation Models

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Quantitative project decision analysis can be performed using a project valuation model, which in most cases is a project schedule or an economic model. A number of schedule network analysis techniques are used in project management, including the critical path method, critical chain methods, event chain methodology, and resource leveling. Influence diagrams can also be used to create a project valuation model. Modeling based on the agile approach to project management does not require determining all project details up front because it focuses on short project iterations with tangible deliverables.

Who do you think are the best project managers? One could argue that they are those who use valuation models to help them understand the process without actually experiencing the process. A project manager can learn how to model a project from the criminals in popular action movies, who always seem to have amazing abilities for precise project planning and execution. Unfortunately, for these characters, in most movies they also have problems with project closing, so the loot ends up on a bus overhanging a cliff. In spite of this, you really believe that they deserve some reward for the slick execution of the project (Figure 12.1).

 

CHAPTER 13: Estimating Probabilities

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Estimating probabilities in project management can be done either subjectively or by using a relative frequency approach based on historical data. Subjective assessment of probabilities can be affected by a number of cognitive biases, such as wishful thinking and overestimation of the probabilities of compound events. A number of methods can be used to make judgments about probabilities. Qualitative risk analysis helps prioritize risks based on their probability and impact.

Wrong estimations of probabilities can lead to major project problems, including failure. During the decision-framing phase (the first phase of the decision analysis process), you identified possible risks and uncertainties. Now you have to define the probabilities that these risks will occur. The probabilities of project risks become part of the project modeling (the second phase of decision analysis) that will be used in the subsequent quantitative analysis (the third phase).

The two approaches to estimating probabilities are:

 

CHAPTER 14: Choosing What Is Most Important: Sensitivity Analysis and Correlations

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To establish project priorities, it is important to identify which activities will have the most effect on a project and to understand how those activities correlate. Our judgment about correlation and causation is affected by a number of biases, such as illusory and invisible correlations and covariation assessment. Sensitivity analysis helps us discover correlations within a project.

In early January 2005 the state of Maine officially launched its new Medicaid claim system (Holmes 2006). This web-based software system was designed to process $1.5 billon in Medicaid claims and payments per year. However, a problem surfaced within the first few days: The new system started to mistakenly reject a huge number of claims from doctors, hospitals, dentists, and other service providers. By the end of March, the system had 300,000 suspended (unpaid) claims.

It soon became clear that numerous software bugs plagued the system. With the huge number of claims rejected, several doctors were forced to close their doors; others had to take loans to continue operation. But this was only a small symptom of a larger problem. The Medicaid program accounted for one-third of the entire state budget and, as a result of the software problem, Maine’s financial stability was in jeopardy. By the end of the summer, the system had a backlog of 647,000 unpaid claims representing $310 million in back payments.

 

CHAPTER 15: Decision Trees and the Value of New Information

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A decision tree is a graph that represents a decision problem. It can be easily generated from a project schedule. Decision trees are used to calculate the expected value or expected utility of an alternative and, as a result, allow you to make a rational choice. Value-of-information analysis is a process that helps determine the price someone should pay to determine the actual value of an uncertainty.

Burglars usually lack good judgment, let alone any expertise in decision analysis. Case in point: Harry and Marv, the two would-be burglars in the movie Home Alone (1990). Based on how they selected their targets, it would be safe to say that neither has a degree in decision analysis from Stanford or Duke (see Figure 15.1). What kind of decision process would lead them to choose to rob a home in the Chicago suburbs when it was occupied—granted by a young boy—if they could break into an unoccupied home nearby? It may be that they constructed a simple decision tree (Figure 15.2) to help them select which home they should consider for their burglary project. (In Chapter 4, if you recall, we briefly mentioned decision trees when we discussed the concept of expected value of projects.)

 

CHAPTER 16: What Is Project Risk? or PERT and Monte Carlo

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One of the fundamental questions of project management is, “What will the duration and cost of the project be, given the multiple risks and uncertainties?” The Program Evaluation and Review Technique (PERT) and Monte Carlo analysis can help to answer these and other questions. Monte Carlo analysis is a straightforward approach for dealing with complex sets of project uncertainties. However, both Monte Carlo and PERT have a number of limitations that are related to how we identify and interpret uncertainties.

With the recent increase in oil prices, the city of Calgary, the oil capital of Canada, has experienced tremendous growth. The population has reached one million, and the cost of all major infrastructure projects has risen dramatically. The original price tag to complete a section of Calgary’s ring road was pegged at $250 million (Canadian) in 2004. By the middle of 2006, cost overruns were estimated to be $235 million (Braid 2006). One-third of this amount could be attributed to changes in the project scope, which included two new intersections; however, the remaining two-thirds was caused by increases in the cost of labor, material, and fuel. Due to these increased costs, the project will be delayed for at least one year.

 

CHAPTER 17: “A Series of Unfortunate Events,” or Event Chain Methodology

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Often, in hindsight, projects can seem like Lemony Snicket’s series of unfortunate events. It is the unexpected effect of a series of events that often derails even the most well managed projects. Event chain methodology is a schedule network analysis technique that focuses on identifying, modeling, and managing the events that can affect a project schedule. Event chain methodology helps determine project duration, cost, and other parameters while taking into account these events and event chains. It also identifies critical risks and crucial tasks, performs resource leveling, and resolves other complex project scheduling problems.

The story of Toyota’s hybrid car, the Prius, is unique (Figure 17.1). Toyota positions itself as risk-averse company and is seen as a “fast-follower,” a company that quickly integrates externally developed technologies into its own products when they have proven to have market acceptance (Taylor 2006). At the same time, Toyota is capable of breaking its own rules, as the Prius example illustrates. The Prius project was launched in 1995 when Toyota’s management wanted to present a hybrid concept at the Tokyo Motor Show, which was only 12 months away. To make things more exciting, management set a requirement that the designers and engineers make at least a 100% improvement in fuel consumption compared to its other models. Finally, management wanted to put the Prius into production within 24 months—about two-thirds the time required for conventional vehicles.

 

CHAPTER 18: The Art of Decision Analysis Reporting

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The results of a decision analysis can be ignored or misinterpreted if they are not reported properly. Interpretations of decision analysis results are affected by cognitive and motivational biases. Decision-makers may have difficulties interpreting results related to probability and risk, especially in the case of rare events with catastrophic outcomes. A number of diagramming tools can help in visualizing the results of project decision analysis and minimize the chance that the results will be misinterpreted.

A young engineer fresh out of college was hired by a large oil company. One of his first tasks was to perform an economic evaluation of an oil reserve. With his classes in probability theory and statistics still fresh in his mind, he performed the full range of decision analysis calculations, including a full sensitivity analysis, a Monte Carlo simulation, several decision trees, and other methods we have described. After weeks of intense work, the young engineer reported his results to his manager. Wanting to impress on his first major assignment, he created a magnificent computer presentation with dozens of slides full of frequency histograms, cumulative probability charts, and other very scientific-looking pictures. After the presentation, the manager was silent for a minute. Then he said, “This is very nice. But what should we do? Should we drill or not drill?”

 

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