I don't want to lose what I've got

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Don't want to slip backward, take a demotion, less pay, risk your savings? Same answer if there is a prospect of doing a whole lot better if you'll just take a risk ...?

Prospect theory may be for you!

Daniel Kahneman and Amos Tversky may be a project manager's best friends when it comes to understanding decision making under conditions of risk. 

Of course, they've written a lot good stuff over the years.....my favorite is "Judgment under uncertainty: Heuristics and biases".  You can find more about this paper in a posting about the key points at HerdingCats. 

The original prospect thinking
Tversky and Kahneman are the original thinkers behind prospect theory..  Their 1979 paper in Econometrica is perhaps the best original document, and it's entitled: "Prospect Theory: An analysis of decision under risk".  It's worth a read [about 28 pages] to see how it fits project management

What's a prospect?  What's the theory?
 A prospect is an opportunity--or possibility--to gain or lose something, that something usually measured in monetary terms.

Prospect theory addresses decision making when there is a choice between multiple prospects, and you have to choose one.

A prospect can be a probabilistic chance outcome, like the roll of dice, where there is no memory from one roll to the next. Or it can be a probabilistic outcome where there is context and other influences, or it can be a choice to accept a sure thing. 

A prospect choice can be between something deterministic and something probabilistic.

The big idea
So, here's the big idea: The theory predicts that for certain common conditions or combinations of choice, there will be violations of rational decision rules. 

Rational decision rules are those that say "decide according to the most advantageous expected value [or the expected utility value]".  In other words, decide in favor of the maximum advantage [usually money] that is statistically predicted.

Violations driven by bias:
Prospect theory postulates that violations are driven by several biases:

• Fear matters: Decision makers fear a loss of their current position [if it is not a loss] more than they are willing to risk on an uncertain opportunity.  Decision makers fear a sure loss more than a opportunity to recover [if it can avoid a sure loss] 
• % matters: Decision makers assign more value to the "relative change in position" rather than the "end state of their position"
• Starting point matters: The so-called "reference point" from which gain or loss is measured is all-important. The reference point can either be the actual present situation, or the situation to which the decision maker aspires. Depending on the reference point, the entire decision might be made differently.
• Gain can be a loss: Even if a relative loss is an absolute gain, it affects decision making as though it is a loss
• Small probabilities are ignored: if the probabilities of a gain or a loss are very, very small, they are often ignored in the choice.  The choice is made on the opportunity value rather than the expected value.
• Certainty trumps opportunity: in  a choice between a certain payoff and a probabilistic payoff, even if statistically more generous, the bias is for the certain payoff.
• Sequence matters: depending upon the order or sequence of a string of choices, even if the statistical outcome is invariant to the sequence, the decision may be made differently.

Quick example
Here's a quick example to get everyone on the page: The prospect is a choice [a decision] between receiving an amount for certain or taking a chance on receiving a larger amount.

Let's say the amount for certain is $4500, and the chance is an even bet on getting $10,000 or nothing. The expected value of the bet is $5,000.

In numerous experiments and empirical observations, it's been shown that most people will take the certain payout of $4,500 rather than risking the bet for more.

The Certainty Effect: Tversky and Kahneman call the effect described in the example the "Certainty effect". The probabilistic outcome is underweighted in the decision process; a lesser but certain outcome is given a greater weight.

The Reflection Effect: Now, change the situation from a gain to a loss: In the choice between a certain loss of $4,500 and an even bet on losing $10,000 or nothing, most people will choose the bet, again an expected value violation. In other words, the  preference....certain outcome vs probabilistic outcome...is changed by the circumstance of either holding onto what you have, or avoiding a loss.

These two effects are summarized in their words:

....people underweight outcomes that are merely probable in comparison with outcomes that are obtained with certainty. This tendency, called the certainty effect, contributes to risk aversion in choices involving sure gains and to risk seeking in choices involving sure losses.

Other Effects:  There are two other effects described by prospect theory, but they are for Part II....coming soon!

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Leadership the Admiral's way

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Nearly 10 years on, it doesn't get old -- or obsolete:

In the November 2010 issue of the Harvard Business Review, there is an interview with Admiral Thad Allen, the retired Coast Guard commandant and the former "National Incident Commander" for the Gulf oil spill of 2010.

Entitled "You have to lead from everywhere", it's a good read for those interested in how an experienced manager with a proven track record approaches different situations under different degrees of urgency and stress.

Interviewer Scott Berinato took the title from a reply Allen made to the question: "In a major crises...do you think it's more important to lead from the front or from the back?", to which Allen replied: "You have to lead from everywhere".

Mental models
Here's the point that struck me: Allen says he approaches every assignment with a number of different mental models of how command might be exercised....Allen is an admirer of Peter Senge, noted MIT advocate of mental models....and may change models as events unfold.  In many situations he has faced, he states that the chain of command model simply doesn't exist!

OMG! No chain of command?!

What he's saying is that in some situations there is no single manager is in charge.

OMG! No one in charge?!

But, Allen can work this way and make it effective. He calls for "unity of effort" rather than "unity of command"

Unity of Effort vs Unity of Command
Allen makes a very interesting distinction in those cases where the organizational model simply does not converge....parallel lines rather than a pyramid, or multiple pyramids with a loosely layered level of federation and coordination:

In what I would call a “whole of government response”—to a hurricane, an oil spill, no matter what it is—that chain of command doesn’t exist. You have to aggregate everybody’s capabilities to achieve a single purpose, taking into account the fact that they have distinct authorities and responsibilities. That’s creating unity of effort rather than unity of command, and it’s a much more complex management challenge.

Admiral Thad Allen, USCG [Retired]

Program management lesson
So, what's the program management lesson here? Well, of course, the lesson is right in the word 'program' that implies multiple projects ostensibly working toward a common objective.

And, of course, the objective may change, forced by unforeseen events.

And if some of the effort is in the government, and some is in contractors and NGO's, and even within the government there are state and federal, or USA and ROW, there's a lot to be learned by studying the methods Allen has championed.

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Agile and Plan-Do-Check-Act

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This is not as stuffy as it sounds:

Plan-Do Check-Act --

• Plan-do-check-act (PDCA) envisions planning--just enough, and gasp! perhaps an estimate as well--for what is to be done, then doing it—that is the plan-do.
• Next, measure results—measuring is the check activity (did someone say: accountability?)—and
• Then act on the measurement results. To act in the PDCA sense means to reflect upon lessons learned and provide feedback for corrective actions to the next iteration of the plan.

Seems intuitive, of course, but in its written form, perhaps only 70 years old (only!) W. Edwards Deming gets most of the credit. Deming--working in Japan and else where in the mid-20th century--introduced very practical ideas of process control as a means to limit variations in product quality.

And, who's not all about product quality?

Deming was a product guy; he came at product quality from the point of view of the product:

Make the product the same way each time and make it work within limits that are acceptable to the customer. But, developing software is not a repetitive cycle (make it the same way each time) although processes are repetitive and they can be somewhat the same quality each time.

The modern poster child for defined process control is Six Sigma, but let's not go there; let's go to Agile

Agile Thinking

Ken Schwaber—a leading SCRUM methodologist—objecting to defined process control, puts it this way, “[defined process control] is based on processes that work only because their degree of imprecision is acceptable… When defined process control cannot be achieved because of the complexity of the intermediate activities; something called empirical process control has to be employed.”

In Schwaber’s view, software is too complex to expect defects to be contained within predefined error limits. Empirical control is the answer; empirical control is derived from observed facts, adapted to the situation, and not determined by preplanned limits from previous projects.

Edwards Deming's impact on agile projects
A project management tip: Deming introduced the PDCA cycle, which is can be wholly embraced by agile teams
• The cycle really applies to all agile iterations. The plan-do is equivalent to the planning session followed by development, test, and integration.
• Especially relevant is the check-act that provides measurement and feedback for continuous improvement.
• Deming focused on eliminating unsatisfactory results before they reached the customer. In agile parlance, every object must pass its unit, functional, and system test, and be acceptable to the customer's idea of quality in the large sense: function, accuracy, available, and appealing

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Of myth and mystique

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I've always held that the key to power and influence is to have and maintain a certain mystique that provides some remoteness ( think: access control ), unpredictability, and mystery about the leader. (Too much familiarity reveals too many weaknesses, etc)

Now comes myth, to add to the mystique:

"In theory, if some holy book [perhaps the body-of-knowledge of the PMO] misrepresented reality, its disciples would sooner or later discover this, and the text’s authority would be undermined. Abraham Lincoln said you cannot deceive everybody all the time.

Well, that’s wishful thinking. In practice, the power of human cooperation networks depends on a delicate balance between truth and fiction. If you distort reality too much, it will weaken you, and you will not be able to compete against more clear-sighted rivals.

On the other hand, you cannot organise masses of people effectively without relying on some fictional myths. So if you stick to unalloyed reality, without mixing any fiction with it, few people will follow you. "

"Homo Deus: A Brief History of Tomorrow" 

by Yuval Noah Harari

Hmmm -- sounds like he's talking about the messaging required to motivate; the justification for certain means to achieve ends; and the fact that the truth -- unvarnished -- maybe unattractive. But, beware: as Harari says it's a delicate balance, with risk as the balancing element. Too much fiction, and you're not credible

But, consider this also from Mr Harari:

"... creating stable human hierarchies and mass-cooperation networks [is possible] as long as people believe [in the myth]

All large-scale human cooperation is ultimately based on our belief in imagined orders.

These are sets of rules that, despite existing only in our imagination, we believe to be as real and inviolable as gravity ..... making it easy to predict the behaviour of strangers and to organise mass-cooperation networks."

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All all PMs capitalists?

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Capitalism is not as popular as it once was. Nonetheless, it's still relevant.

We ask:
Are PMs all capitalists? Should we be? We could be: we work for money, and we spend other people's money (OPM) to drive outcomes, reaching for "success" all the time, and fearful of failure (consequence: we may not get another chance to be the leader)

But, do we have a conscience? Do we care what we are working on? If we were asked to build the first "bomb" would we do it for the science and engineering, and leave the policy and philosophy to others?

I've certainly had friends who've "opted out" of some programs. When I worked in the US DoD as a program manager, there things that gave me pause. Likely, most of us have paused at the juncture of capitalism and society at large.

McKinsey has a post on more or less this topic. Here's a thought that goes to the PM business:

Human creativity develops a variety of ways to solve ... problems, but some inevitably work better than others, and we need a process for sorting the wheat from the chaff. We also need a process for making good solutions widely available.

Capitalism is the mechanism by which these processes occur. It provides incentives for millions of problem-solving experiments to occur every day, provides competition to select the best solutions, and provides incentives and mechanisms for scaling up and making the best solutions available.

Meanwhile, it scales down or eliminates less successful ones. The great economist Joseph Schumpeter called this evolutionary process “creative destruction.”

The orthodox economic view holds that capitalism works because it is efficient. But in reality, capitalism’s great strength is its problem-solving creativity and effectiveness. [emphasis added] It is this creative effectiveness that by necessity makes it hugely inefficient and, like all evolutionary processes, inherently wasteful.

Capitalism inevitably leads to the dichotomy of "win-win" or "win-lose": Solve everyone's problems, but each less optimally; or solve one problem optimally and let the others suffer. Classic game theory! (See Chapter 12 of my latest book on Maximizing Project Value").

Clearly, as PMs we don't relish "pulling our punch" and serving up the less optimum knowingly.

McKinsey -- somewhat unhelpfully -- leaves us with this issue but no real solution:

.... the solutions capitalism produces are what creates real prosperity in people’s lives, and that the rate at which we create solutions is true economic growth, .... entrepreneurs and business leaders bear a major part of both the credit and the responsibility for creating societal prosperity.

But standard measures of business’s contribution—profits, growth rates, and shareholder value—are poor proxies. Businesses contribute to society by creating and making available products and services that improve people’s lives in tangible ways, while simultaneously providing employment that enables people to afford the products and services of other businesses. It sounds basic, and it is, but our economic theories and metrics don’t frame things this way

Here's another way to frame this that is familiar to PMs who read this blog: the focus of projects should be on outcomes first, inputs (like cost, schedule, specifications, shareholder value etc) second.

As "outcomists" we can be cognizant of the larger landscape. As "inputists" we can be responsible for being good stewards of resources. But, outcome dominates input... in my opinion.

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"Off the cuff" is a better style

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Every project manager speaks to groups in public... it goes with the territory. But, what happens if someone drops in unexpectedly and an off the cuff briefing or speech or speaking opportunity portends?

If this is not your strong suit, here's some worthy advice from John Coleman writing at the hbr.org network blog:

1. Define a structure: The pressure of extemporaneous remarks comes from their ambiguity. What do I say? What do I not say? The worst and most stressful business speeches are those that ramble without purpose. In forensics we’d tackle this issue by quickly drafting a structure on a note card to support our main point — often an introduction, two or three supporting points, and a conclusion.

2. Put the punchline first: When I worked in consulting, one of the cardinal rules of communication was “punchline first.” Any presentation should have a clear thesis stated up front so that listeners can easily follow and interpret the comments that follow.

3. Remember your audience: All it takes is a few lines to make an audience feel acknowledged and a speech feel fresh. Tie the city in which you are speaking into your introduction. Draw parallels between the organization you’re addressing and one of the stories you tell. Mention someone by name, connecting them to the comments you’re offering.

4. Memorize what to say, not how to say it: How many times have you practiced exactly how to say something in your head then frozen up or completely forgotten in the moment? The trick was this: We’d focus on memorizing key stories and statistics, rather than practicing our delivery. If you spend your time on how to say something perfectly, you’ll stumble through those phrasings

5. Keep it short: Blaise Pascal once famously commented, “I have only made this letter rather long because I have not had time to make it shorter.” While it seems like the challenge of speaking with limited preparation would be finding enough to say, the opposite is often true. When at a loss for words, many of us underestimate the time we need — cramming in so many stories and points that we run well over our time and dilute our message. No one will appreciate your economy of words more than your listeners, so when in doubt, say less.

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Read in the library at Square Peg Consulting about these books I've written
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