Cognitive Uncertainty:A Barrier to Better Project Risk Management

Douglas Hutcheon, MBAJohn Prpić, MBA

• Understanding that Risk is a form of Uncertainty• Recognizing Cognitive Bias in your Team• Actionable Guidance for Better Project Risk Management

Learning Points

Introduction• Who am I?• Who is John Prpić?

The Current State Establishing the Context

• Organizational Structure• Reporting Lines• Departmental Autonomy

• Standards, Tools, and Terminologies• Dueling Academics/Methodologies/Practices/Recommendations

• Role Power• Profession or Process?

• Strategy• Missing, Misaligned, Marginalized

Risk is a form of UncertaintyThe Risk Space / Know Your Enemy

• The Problem with Definitions• The Great Uncertainty• The Role of Ambiguity• The Affect of Cognitive Uncertainty

The Risk Equation

The Problem with Definitions• Semantic Drift• Uncertainty according to…• Risk according to…

• Types of Risk

• According to Knight, uncertainty is: a situation with only subjective or “unmeasured” probabilities [Qualitatively Analyzed]

• According to the OED uncertainty is: something that you cannot be sure about

Uncertainty according to…

• According to Knight Risk is: “measurable Uncertainty” or objective probabilities. [Quantitatively Analyzed]

• According to the PMI Risk is: "an uncertain event or condition that, if it occurs, has a positive or negative effect on a project's objectives.”

• According to the OED Risk is: A situation involving exposure to danger.

Risk according to…

Negative• Tangible impacts are easier to estimate/quantify• Intangible impacts are more difficult to estimate/quantify• Require Mitigation

Positive• Tangible impacts are easier to estimate/quantify• Intangible impacts are more difficult to estimate/quantify• Require Exploitation or Capture Planning

Types of Risk

The Great Uncertainty

Ambiguous Data 1• Affects the precision of your Risk Inputs • Effects the accuracy of your Risk Outputs/Product/Analysis

Organizational Ambiguity b• Generally considered a bad thing.• Can some ambiguity be a good thing?

Ambiguity as Constraint d• Can ambiguity be designed or planned to illicit better decision

making?

The Role of Ambiguity

Individual• Differing mix of biases

Situational• Resource strength i.e. time/budget/people

Mission• Greater risk taking behavior to achieve established Schedule or Profit

targets• Reduced appetite for Risk after target met

Casualties• Higher value resources are not risked as often• Lower value resources are risked more often

Past Battles• Past successes make future successes seem more likely

The Affect of Cognitive Uncertainty 1

Risk = Likelihood (L%) x Impact (I$) - [Expected]

Adjust for Ambiguity / Quality of Data

Risk = (L% Range) x (I$ Range) - [Probabilistic]

Adjust for observed Bias

Risk = (L% Range / Distribution Selection ) x (I$ Range / Distribution Selection) – [Calibrated?]

The Risk Equation

Cognitive Bias in Your TeamWhy Things Are Seen

• Become a Trained Observer• Not just visual• Active listening

My biased list of Biases• Heuristics• Planning Fallacy• Status Quo• Illusion of Control• Professional Viewpoint Effect

Heuristics a.k.a. Rules of Thumb

The Textbook Definition: OED: A broadly accurate guide or principle, based on practice rather than theory.

What it sounds like: “Risk and Contingency is always about 6%”

What it means: We are okay with some inaccuracy (greater uncertainty)

What to do: Query for pedigree.

The Planning FallacyThe Textbook Definition: The tendency to underestimate the duration of project activities. c

What it sounds like: “Build me a schedule that finishes three months early”

What it means: Sound scheduling practice will initially be compromised

What to do: Plan from the ground up.

Status QuoThe Textbook Definition: The inclination of decision-makers to like things to stay relatively the same. c

What it sounds like: “This is the way we always do it”

What it means: Resistance to change.

What to do: Educate and Communicate.

Illusion of ControlThe Textbook Definition: The tendency of decision-makers to believe they can control or influence outcomes over which they have no influence. c

What it sounds like: “We can always re-sequence or crash the schedule”

What it means: Often, the activity in question is lacking detail.

What to do: Conduct Risk-adjusted scenario analysis to see if re-sequencing and crashing could actually be done.

Professional Viewpoint Effect

The Textbook Definition: The tendency to look at things according to the conventions of a decision-maker’s profession, forgetting any broader point of view. c

What it sounds like: “..but we are entitled to compensation…” / “..its the right thing to do…”

What it means: “You need a strong communication strategy”

What to do: Set expectations.Use a visual.

Actionable GuidanceImmediate Actions (IAs) or the “How To”

• Add to your Agendas • Train throughout and at all levels• Add to your PMO’s portfolio• Improve Transparency with meaningful KPIs• Emphasize Accountability• Explore Incentivisation

Papers1- Project Risk Management Incorporating Knight, Ellsberg & Kahneman. Prpić, J., (2016). Proceedings of the Hawaii International Conference on System Sciences #49. January 2016, Kauai, Hawaii, USA. IEEE Computer Society Press2 - The Affect of Organizational Structure on the Successful Delivery of Mega- scale Construction Projects. Hutcheon, D., (2014). MBA Applied Paper. Athabasca University

Booksa - The Failure of Risk Management: Why its broken and how to fix it.Douglas W. Hubbard

b - Inside Megaprojects: Understanding Cultural Practices in Project Management. Alfons Van Marrewijk et al.

c - Project Decisions: The Art and Science. Lev Virine and Michael Trumper

d – A Beautiful Constraint: How To Transform Your Limitations into Advantages, and Why It’s Everyone’s Business. Adam Morgan and Mark Barden

• Understanding that Risk is a form of Uncertainty• Recognizing Cognitive Bias in your Team• Actionable Guidance for Better Project Risk Management

Learning Points

Cognitive Uncertainty:A Barrier to Better Project Risk Management

Douglas Hutcheon, MBAJohn Prpić, MBA