Decision Diagnosis


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Importance of Decision Diagnosis in Project Management

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Decision Diagnosis

  2. 2. Example: San Francisco Bay Bridge2 Beginning 2005 – Decision to stop construction Later 2005 – Decision of continue construction based on original project Result: $81M cost overrun. Will be paid by California taxpayers and toll payers Wali Memon March 21, 2010
  3. 3. Burden of Wrong Decision3 Cost of wrong decisions in pharmaceutical industry is passed to consumers Dry hole cost in oil and gas industry is passed to motorists Wrong policy decisions by government will be passed to taxpayers You paint your deck without properly removing old paint. You have to do it again next year. Wali Memon March 21, 2010
  4. 4. Why is decision-making so complicated ?4 Most problems in project management involve multiple objectives Project managers are always dealing with uncertainties Project management problems may be very complex Most projects include multiple stakeholders Wali Memon March 21, 2010
  5. 5. How Decisions Are Made?5 No uncertainties – No alternatives No alternatives – No decisions Two decision-making approaches: Advocacy-based Decision Analysis approach Process Wali Memon March 21, 2010
  6. 6. Do We Have a Solution?6 Decision Analysis Process Decision Science Theory of Probability Psychology of and Judgment and Statistics Decision Making Wali Memon March 21, 2010
  7. 7. Human Judgment Is Always to Blame7 This study by Swiss Federal Institute of Technology in Zurich analyzed 800 cases of structural failures where engineers were at fault. In these incidents 504 people were killed, 592 injured and millions of dollars of damage incurred. Insufficient Knowledge – 36% Underestimation of influence – 16% Ignorance, carelessness, neglect – 14% Forgetfulness – 13% Relying upon others without sufficient control – 9% Objectively unknown situation – 7% Other factors related to human error – 5% Wali Memon March 21, 2010
  8. 8. Blink or Think?8 Wali Memon March 21, 2010
  9. 9. Intuitive Thinking9 When you think automatically and sometimes when you are analyzing a situation, you apply certain simplification techniques. We use these techniques due to limitations in our thinking mechanisms. In many cases, these simplification Vulcans as Mr. Spock make techniques can lead to wrong logical choices, but not judgments. necessarily the best Wali Memon March 21, 2010
  10. 10. Decision-Making Training10 You may train yourself to overcome biases the same way as you train yourself to walk on the glass floor of Toronto’s CN Tower Wali Memon March 21, 2010
  11. 11. Garbage In/Garbage Out:11 Project managers know it Advanced analytical tools Solutions: 1. Perform analysis based on reliable historical data Useless results of 2. Track project performance and analysis constantly refine data Wali Memon March 21, 2010
  12. 12. Biases12 Cognitive – hard to detect, possible to mitigate by training Motivational – easy to detect, hard to mitigate negative effect Reality 30% 35% 40% 45% 50% 55% 60% 70% Bias is a discrepancy Your judgment between somebody’s judgment and reality What caused this error in judgment? Wali Memon March 21, 2010
  13. 13. HEURISTICS AND BIASES The Bank of Sweden Prize in Decision makers use Economic Sciences in Memory “heuristics”, or of Alfred Nobel 2002 general rule of thumb, Daniel Kahneman to arrive to their judgments. for having integrated insights from psychological research into economic science, In certain instances especially concerning human they lead to systemic judgment and decision- biases. making under uncertainty
  14. 14. Some Heuristics in Probabilistic BusinessModeling Representativeness – unwanted appeal to detailed scenarios Availability – access the probability of an event by the ease with which instances can be brought to mind. Anchoring – human tendency is to remain close to the initial estimate Solution: established uncertainty management process in the organization14 Wali Memon March 21, 2010
  15. 15. Availability15 Welcome to Our Friendly Casino This year 168,368 people lost $560M here. 5% of our guests divorced, 1% became alcoholics, and 0.4% committed suicide. Wali Memon March 21, 2010
  16. 16. Selective Perception16 “I see what I want to see” Overconfidence Edon Brunswik ‘s Confirmation bias Lens Model External World Psychological Processes Input Judgment Lens of Cues Memon Wali March 21, 2010
  17. 17. Selective Perception17 Are you motivated to see the project in a particular way? What do you expect from this particular decision? Would you be able to see project differently without these expectations and motivational factors? Wali Memon March 21, 2010
  18. 18. Behavioral Traps18 Sunk cost effect Investment trap (Money Pit Movie) Time delay (balance long-term and short-term goals) Ignorance trap – usability to realize consequences of wrong decisions for a long time Deterioration trap (maintenance of legacy products) Wali Memon March 21, 2010
  19. 19. Framing19 Scenario 1: You are involved in a construction project worth $300 million and have discovered a new approach that would save $1 million. It will take you a lot of time and effort to do the drawings, perform structural analysis, and prepare a presentation that will persuade management to take this course. Would you do it? Scenario 2: You are involved in an IT project worth $500,000 and discovered a way to save $80,000. You need to spend at least a couple of days for researching and putting together a presentation. Would you do it? Scenario 3: You are involved in the same construction project as in Scenario 1 and found a way to save $80,000 (replace one beam) and need to spend a couple of days on research and the presentation. Would you do it? Wali Memon March 21, 2010
  20. 20. Decision Analysis Manifesto20 What do we want from decision analysis process? We want the decision to be made rationally. We want decision-making process to be transparent We want to have a mechanism to correct mistakes Wali Memon March 21, 2010
  21. 21. Decision Analysis Process21 Steps of Decision Analysis Process Project Risk Management Processes (PMBOK) Identification Problems or Opportunities Decision Assessing Business Situation Risk Management Planning Determining Success Criteria Risk Identification Framing Identifying Uncertainties Generation Alternatives Modelling Creating Models for Project Alternative Qualitative Risk Analysis the Situation Quantifying Uncertainties Determining What Is Most Important Quantitative Quantitative Analysis Quantifying Risks Associated with Project Risk Response Planning Analysis Determining the Value of New Information Deciding on a Course of Actions Implemetation Implementing the Best Alternative Monitoring the Project Implementation Risk Monitoring and Control Monitoring Evaliation of the Decision Experience Evaluation Wali Memon March 21, 2010
  22. 22. 3D Principle of Decision Analysis22 Wali Memon March 21, 2010
  23. 23. Decision Analysis Process vs.23 PMBOK© Guide Risk Management Decision PMBOK Risk Analysis Management Process Process Tools and processes to manage risks Wali Memon March 21, 2010
  24. 24. What is the rational choice?24 Decision policy is a set of principles or preferences used for selection alternatives. Is he rational decision maker? Strong emphasis on profitability; Low emphasis on the safety of adversaries and a strong emphasis on the security of its own employees with a special concern for management; Low regard for following legal rules and regulations; Strong emphasis on organizational structure including clear definitions of roles, responsibilities, and reporting; Strong emphasis on fostering good relationships with the local community . Rational behavior is behavior that maximizes the value of consequences and based on decision Wali Memon March 21, 2010 policy
  25. 25. Expected Value25 For example, a big pharmaceutical company has two choices: 1. Continue developing a drug. The chance that it will get FDA approval is 80%. If the drug is approved, the company will get $800 million, but if it fails, the company will have lost the $200 million it in development costs (20% chance). 2. Buy another company that has already developed an FDA approved drug. The estimated profit will be $500 million dollars. Wali Memon March 21, 2010
  26. 26. Decision Tree26 FDA Approval $800M 80% Develop own No FDA Approval -$200M Strategy 20% Decision Buy Company $500M Expected value is a probability-weighted average of all outcomes. It is calculated by multiplying each possible outcome by its probability of occurring and then adding the result. Wali Memon March 21, 2010
  27. 27. Utility Function27 Utility Objective Measure (Money) Utility reflects a preferences of decision-maker toward different factors, including profit, loss, and risk. Wali Memon March 21, 2010
  28. 28. Risk Avoider vs. Risk Taker28 Utility Risk Neutral Decision Maker Risk Avoider Risk Taker Objective Measure Wali Memon March 21, 2010
  29. 29. Future Reading29 Lev Virine and Michael Trumper Project Decisions: The Art and Science Management Concepts, Vienna, VA, 2007 Wali Memon March 21, 2010
  30. 30. Questions?30 “There are those that look at things the way they are, and ask why? I dream of things that never were, and ask why not? “ George Bernard Shaw Wali Memon March 21, 2010