Coaching Solutions
Irrational Loss Aversion

                                      Brian Bozzuto




             © 2009 B...
But First, an Auction!                                                            Irrational Loss Aversion


    Click to ...
A Couple Rules                                                                    Irrational Loss Aversion


    Click to ...
Where the Money is Going…                                                         Irrational Loss Aversion


    Click to ...
Irrational Loss Aversion                                                            Irrational Loss Aversion


    Click t...
This Isn’t a Unique Instance                                                                    Irrational Loss Aversion

...
So What is at Play Here?                                                                                   The Agile Analy...
People Bear More Risk to Avoid a Loss                                                         The Agile Analyst


    ►___...
How Does This Apply IT Projects?                                                       Irrational Loss Aversion


    Clic...
What’s Happens to a Project if We Can’t Kill It?                                      Irrational Loss Aversion


      Cli...
What is at Stake for the Team?                                                      The Agile Analyst


     Click to edit...
What are the Sources of Pressure?                                                        The Agile Analyst


     Click to...
My Experience                                                                               Irrational Loss Aversion


   ...
My Experience (Continued)                                                                    Irrational Loss Aversion


  ...
My Experience (Concluded)                                                                   Irrational Loss Aversion


   ...
How Do We Address Loss Aversion?                                                        The Agile Analyst


     Click to ...
How Should We Frame Projects?                                                          The Agile Analyst


      ____ __ _...
What Options Do We Have?                                                                The Agile Analyst


     Click to ...
Conclusion                                                                          Irrational Loss Aversion


     Click ...
Thank You!                                                                        Irrational Loss Aversion


     Click to...
Upcoming SlideShare
Loading in …5
×

Irrational Loss Aversion

1,097 views

Published on

Brian Bozzuto's irrational loss aversion slides from Agile 2009."Consumers will cut purchases of a specific food stuff (eggs, orange juice) 2.5 times more than they will increase in response to a price cut" < Irrational

0 Comments
1 Like
Statistics
Notes
  • Be the first to comment

No Downloads
Views
Total views
1,097
On SlideShare
0
From Embeds
0
Number of Embeds
3
Actions
Shares
0
Downloads
0
Comments
0
Likes
1
Embeds 0
No embeds

No notes for slide

Irrational Loss Aversion

  1. 1. Coaching Solutions Irrational Loss Aversion Brian Bozzuto © 2009 BigVisible Solutions, Inc. All Rights Reserved
  2. 2. But First, an Auction! Irrational Loss Aversion Click to edit Master text styles ____ __ ____ _____ ____ ______ Second _____ _____ level Third level ____ _____ Fourth level _____ _____ Fifth level ____ _____ © 2009 BigVisible Solutions, Inc.. All Rights Reserved 2
  3. 3. A Couple Rules Irrational Loss Aversion Click to edit Master text styles starts at $1 ____ __ ____ _____ ____ ______ 1. Bidding for the $20 bill Second _____ _____ level 2. All bids must be in increments of $1 Third level ____ _____ Fourth level _____ _____ 3. The two top bidders both must pay, but only the top Fifth level ____ _____ bidder gets the $20 bill © 2009 BigVisible Solutions, Inc.. All Rights Reserved 3
  4. 4. Where the Money is Going… Irrational Loss Aversion Click to edit Master text styles ____ __ ____ _____ ____ ______ Second _____ _____ level Third level ____ _____ Fourth level _____ _____ Fifth level ____ _____ © 2009 BigVisible Solutions, Inc.. All Rights Reserved 4
  5. 5. Irrational Loss Aversion Irrational Loss Aversion Click to editmuch did ____$20 bill go for? ► So how Master textthe ______ ____ __ ____ _____ styles Second _____ _____ level Third level ____ _____ Fourth level _____ _____ Experience with the game has shown that Fifth level ____ _____ it is possible to 'sell' a dollar bill for considerably more. A total of payments between three and five times the value of is not uncommon. (Shubik, 1971) © 2009 BigVisible Solutions, Inc.. All Rights Reserved 5
  6. 6. This Isn’t a Unique Instance Irrational Loss Aversion Click to edit Master text styles ► Consumer Behaviors____ ______ ____ __ ____ _____ Second _____ will cut purchases of a specific food stuff (eggs, orange juice) 2.5 times _____ level Consumers Third levelthan they will increase in response to a price cut ____ more _____ Fourth level _____ _____ Fifth level ____ _____ ► Packaging of Products “Unlimited” Plans All Inclusive Resort Package Insurance on a Rental Car ► Individual Behaviors People will assume more risk to avoid realizing a loss Doubling down on a loss when gambling © 2009 BigVisible Solutions, Inc.. All Rights Reserved Brafman, Brafman, 2008 6
  7. 7. So What is at Play Here? The Agile Analyst Click to edit Master text styles ____ __ ____ _____ ____ ______ ► Loss Aversion Value Second _____value gains in a _____ level People Third level ____ consistent, rational way _____ Fourth level _____ _____ Individuals value avoiding Fifth level ____ _____ a loss twice as much as an equally sized gain Loss Gain Prospect Theory of Valuation "Kahneman & Tversky’s (1979) “Prospect Theory: An analysis of decision under risk” © 2009 BigVisible Solutions, Inc.. All Rights Reserved 7
  8. 8. People Bear More Risk to Avoid a Loss The Agile Analyst ►____to edit Stock, trading at ______ Click __ ____ _____ ____ $90 Consider a Master text styles Second _____Bought the stock at $80 _____ level Person #1: Third level#2: Bought the stock at $100 Person ____ _____ Fourth level _____ _____ ►____level is 50% more likely to Fifth _____ Person #2 hold the stock and not sell it ► Individuals Make Less Optimal In our attempts to avoid Decisions Stocks that individuals sell in this realizing a loss, we make situation performed 3.4% better than the situation worse the investments they held © 2009 BigVisible Solutions, Inc.. All Rights Reserved Odean, 1998 8
  9. 9. How Does This Apply IT Projects? Irrational Loss Aversion Click to edit Master textan ______ ► Projects are Basically____ ____ __ ____ _____ styles Second _____ _____ level Investment Third level ____ _____ ► Some Figures to Consider Fourth level “Troubled Projects”, 2006) _____ _____ (PM Solutions, Fifth level of Projects were “Troubled” ____ 47% _____ 30% of Troubled Projects Continued with No Justification Major impediment was stakeholders not acknowledging there was a problem © 2009 BigVisible Solutions, Inc.. All Rights Reserved 9
  10. 10. What’s Happens to a Project if We Can’t Kill It? Irrational Loss Aversion Click to edit Master text styles ____ __ ____ _____ ____ ______ Second _____ _____ level Third level ____ _____ Fourth level _____ _____ Fifth level ____ _____ © 2009 BigVisible Solutions, Inc.. All Rights Reserved 10
  11. 11. What is at Stake for the Team? The Agile Analyst Click to edit Master text styles ____ __ ____ _____ ____ ______ Business Case of the Project ► Second _____ _____ level ► Cost Incurred to Date Third level ____ _____ Fourth level _____ _____ ► Reputation of the Team Fifth level ____ _____ Members ► Employment of the Team Members ► Ego of the Team Members © 2009 BigVisible Solutions, Inc.. All Rights Reserved 11
  12. 12. What are the Sources of Pressure? The Agile Analyst Click to editCulture that Rewards Heroics ► Corporate Master text styles ____ __ ____ _____ ____ ______ Second _____ it right” ► Desirelevel _____ to “Do Third level ____ _____ ► Unrealistic Expectations of Stakeholders Fourth level _____ _____ ► Single Release After a Long Build Cycle Fifth level ____ _____ Agile Helps Alleviate These Pressures, but Doesn’t Guarantee Anything © 2009 BigVisible Solutions, Inc.. All Rights Reserved 12
  13. 13. My Experience Irrational Loss Aversion Click to edit Masterwas____ ______ generation portal to help ► Alpha Company textbuilding a next ____ __ ____ _____ styles Second _____ _____ levelmake financial decisions investors Third level Flex, AJAX and other Web 2.0 technologies ____ Leveraged _____ Fourth level contextual information and mash ups relating information to their own Provided _____ _____ Fifth level or watch lists ____ positions _____ Depended on numerous web services from upstream systems ► Ultimately this platform was not scalable for the number of users or level of performance the business wanted © 2009 BigVisible Solutions, Inc.. All Rights Reserved 13
  14. 14. My Experience (Continued) Irrational Loss Aversion Click to 3 ____ _____ ____ ______ ► After edit Master text styles performance issues ____ __ months, there were Second _____ _____ level partners wanted to continue building out functionality Business Third level wanted to “throw out” the work they had done to date ____ Nobody _____ Fourth level became protective of their code, designs, and even technology choices Individuals _____ _____ Fifth level ► The_____ continued for 6 more months ____ project Application was functionally complete, but made too many demands from upstream systems Serious performance issues when loading various components (load times in excess of 10 seconds for individual pages) ► After 9 months, an architecture team intervened Many Web 2.0 technologies were removed from the application Nearly 9 months of work was ultimately discarded Far behind schedule, a stripped down system was agreed upon and delivered 3 months later © 2009 BigVisible Solutions, Inc.. All Rights Reserved 14
  15. 15. My Experience (Concluded) Irrational Loss Aversion Click What Happened? ____ ______ ► So to edit Master text styles ____ __ ____ _____ Second _____became invested not only in their product, but also in their technical _____ level The team ____ choices Third level _____ _____ _____ time line a single, large launch, making it difficult to back down from The business outlined Fourth level an ambitious Fifth level wanted to admit the project needed an adjustment ____ Nobody _____ ► Like the Dollar Auction, Each Group Kept Bidding Higher ► Teams Operated in 2-week Sprints, But No Team was Willing to Stop and Adjust © 2009 BigVisible Solutions, Inc.. All Rights Reserved 15
  16. 16. How Do We Address Loss Aversion? The Agile Analyst Click to edit Master text styles ____ __ ____ _____ ____ ______ Acknowledgement is the ► Second _____ _____ level First Step Third level ____ _____ We need to understand that Fourth level _____ _____ people can operate in irrational ways. Fifth level ____ _____ Even if we inspect every few weeks, teams may not be willing to confront the real issues © 2009 BigVisible Solutions, Inc.. All Rights Reserved 16
  17. 17. How Should We Frame Projects? The Agile Analyst ____ __ ____ _____ ____ ______ Individuals behave differently if Click to edit Master text styles ► Second _____ _____ level the same scenario is framed Third level ____ _____ differently $30 and then a coin toss to win Fourth level _____ _____ or lose $9 Fifth level ____ _____ • (70% accept the coin toss) $30 or a coin toss for either $21 or $39 (43% accept the coin toss) • Organizations framing failure or any setback as a loss will experience more loss aversion © 2009 BigVisible Solutions, Inc.. All Rights Reserved 17
  18. 18. What Options Do We Have? The Agile Analyst Click to edit Master text styles ____ __ ____ _____ ____ ______ ► Identify More Options Second _____ _____ level See the Opportunity Cost of Third level ____ _____ the Status Quo Fourth level _____ _____ Provide Other Avenues for Fifth level ____ _____ the Project’s Resources © 2009 BigVisible Solutions, Inc.. All Rights Reserved 18
  19. 19. Conclusion Irrational Loss Aversion Click to edit Appreciate____Dynamic Caused by Loss Aversion We Need ____ _____ the ______ ____ __ to Master text styles Second _____ _____ level ► Acknowledge There is an Issue Third level ____ _____ ► Frame the Problem in a Way That Allows You to Back Down Fourth level _____ _____ Fifth level ____ _____ ► Identify Alternatives ► Being Agile Isn’t Enough © 2009 BigVisible Solutions, Inc.. All Rights Reserved 19
  20. 20. Thank You! Irrational Loss Aversion Click to edit Master text styles ____ __ ____ _____ ____ ______ Second _____ _____ level Third level ____ _____ Fourth level _____ _____ Fifth level ____ _____ © 2009 BigVisible Solutions, Inc.. All Rights Reserved 20

×