CIO Dashboard » Behavioral Economics and Project Failure

Behavioral Economics and Project Failure

post by Chris Curran on May 17, 2010

Over the last month, I have had three conversations that have dealt with large projects in various states of failure:

A large financial services firm is several years, several attempts and $100M into a core transaction processing system replacement and is considering another $50-100M investment “to get it done this time”
Three industry competitors are collaborating on a highly profitable on-line marketplace to bypass a popular intermediary, but one of them is trying to do a deal by themselves on the side.
A global consumer services company is in the early stages of a 10-year application and infrastructure outsourcing deal, in which the vendor is also one of their largest customers

In each of these cases, the challenging issues stem from the biases and behaviors of each project’s leadership rather than straightforward issues of simply scope or budget.

Beyond Scope, Schedule and Budget

You have probably used the phrase “scope, schedule, budget” at least once in your life to discuss the immutable triad of project management - I know I have. Some even go so far as to call these the legs of the project management stool and that each leg must work together to hold up the project. The standards bearer for project management, the Project Management Institute, describes the 9 knowledge areas in its Project Management Body of Knowledge (PMBOK) as the management of: Integration, Scope, Time, Cost, Quality, Human Resource, Communications, Risk and Procurement.

In addition to scope, schedule and budget, the PMI has added elements to help managers understand resources, procurement, quality and risk and how they all fit together. All good adds - unfortunately, all of these miss a critical cause of project failure.

Reflect on the major projects over your career that you wish went better. Why did they go off the rails? For me, the projects with the poorest outcomes came out that way not by surprise, but after a series of interim decision points during which leadership reviewed the major project issues and alternative courses of action, and selected one course they thought would best right the ship. Yes, these checkpoints and decisions considered scope, schedule, budget, people and other traditional PM dimensions. But, maybe there are other important but less well understood behavioral factors at play here that can undermine our efforts?

How Do People Fit In?

Consider this experiment. A researcher asks shoppers in a department store if they would rather have $100 in a month or $110 in a month plus one day. All responses say the latter. Then, they are asked if they would like $100 today or $110 tomorrow, and a large majority answer $100 today! What is going on here?

The last year or two has seen an upswing of researchers who are trying to explain these kinds of unexpected behaviors and why consumers don’t make purchasing decisions purely based on micro-economic principles. This blend of economics and emotion is known as behavioral economics and can be further explored by reading Duke researcher and Diamond advisor Dan Ariely’s great book Predictably Irrational and by watching PBS’s recent Nova special Mind Over Money.

Major project decisions are large and complex buying decisions. They have costs and benefits and qualitative rationale for doing them. But, they also have people making them, people with their own backgrounds, incentives, experiences and baggage.

What can we learn from behavioral economics to improve the way we make project decisions and improve project successes?

Behavioral Economics Applied to Projects

Paul D’Alessandro leads our customer strategy practice and is one of our experts in the application of behavioral economics. He describes three categories of behaviors that depart from traditional micro-economic theory. I’ve taken each and added some thoughts on how they could be applied to project decision-making, especially when facing a key checkpoint or when evaluating a major project change or issue.

BE Category	Sample Consumer Behavior	Project Decisions Analogy
Decision Shortcuts	- Use the cost of something else similar for comparison instead of knowing the actual value of something - Over reliance on a “default” option as the best option - Use rules of thumb rather than understand actual need	Often, we create 3 options to consider when addressing a project issue. These options should be developed with equal effort and with every intention of making them all viable. Many times, we presuppose the “best” or most likely option, make the second one similar but less desirable and the third, very different and hard to compare to the others.
Irrational Value Assessment	- “Free” products cause purchasers to overlook underlying math - Higher priced items are often seen as better value or quality - Customers act differently based on how options are presented	Don’t overvalue “free” services offered by a vendor or integrator to “fix” a problem. Make sure that all alternatives are presented using the same framework to compare the costs, benefits, risks, ability to address the issue at hand, etc.
Emotional and Social Impacts	- Valuation of future purchases are made on the basis of past purchases and behaviors - Different decisions are made when in a “hot” emotional state than when in a “cold state - Buyers place a higher sensitivity to cash than other representations of value - People do or believe things because others do the same - get on the bandwagon	Don’t put too much weight on what other companies/competitors are doing. Instead, focus on your needs and expectations. When a major project issue is uncovered - large schedule slip, failure of a technology component - introduce a “cooling down period” before any major decisions are made.

BE Category

Sample Consumer Behavior

Project Decisions Analogy

Decision Shortcuts

- Use the cost of something else similar for comparison instead of knowing the actual value of something

- Over reliance on a “default” option as the best option

- Use rules of thumb rather than understand actual need

Often, we create 3 options to consider when addressing a project issue. These options should be developed with equal effort and with every intention of making them all viable. Many times, we presuppose the “best” or most likely option, make the second one similar but less desirable and the third, very different and hard to compare to the others.

Irrational Value Assessment

- “Free” products cause purchasers to overlook underlying math

- Higher priced items are often seen as better value or quality

- Customers act differently based on how options are presented

Don’t overvalue “free” services offered by a vendor or integrator to “fix” a problem.

Make sure that all alternatives are presented using the same framework to compare the costs, benefits, risks, ability to address the issue at hand, etc.

Emotional and Social Impacts

- Valuation of future purchases are made on the basis of past purchases and behaviors

- Different decisions are made when in a “hot” emotional state than when in a “cold state

- Buyers place a higher sensitivity to cash than other representations of value

- People do or believe things because others do the same - get on the bandwagon

Don’t put too much weight on what other companies/competitors are doing. Instead, focus on your needs and expectations.

When a major project issue is uncovered - large schedule slip, failure of a technology component - introduce a “cooling down period” before any major decisions are made.

The next time you are faced with a major project issue, try to apply some of this thinking to the way you develop and present alternatives. It may be the difference between success and failure.

I plan to explore these ideas further but wanted to get the ball rolling with some of the basics. Let me know what you think.

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http://businessparadigms.blogspot.com Mark N. Stine

I do find this facinating as well. I work for an international Oil and Gas services company that the directors seem to understand that they do not have the skills to run day to day operations so they run each region autonomously. This works great for somethings but their idea to run IT as a global function is painful as they have no other functions to base this model off of, and often do not manage the process well even when what is required of them is spelled out to them by me.

This is obviously a political move based on factors that I cannot see. I keep looking for ways to understand what this backwater is and how to use it to my advantage.

Keep up the great reporting.
Mark
http://businessparadigms.blogspot.com Mark N. Stine

I do find this facinating as well. I work for an international Oil and Gas services company that the directors seem to understand that they do not have the skills to run day to day operations so they run each region autonomously. This works great for somethings but their idea to run IT as a global function is painful as they have no other functions to base this model off of, and often do not manage the process well even when what is required of them is spelled out to them by me.

This is obviously a political move based on factors that I cannot see. I keep looking for ways to understand what this backwater is and how to use it to my advantage.

Keep up the great reporting.
Mark
Jay

“Consider this experiment. A researcher asks shoppers in a department store if they would rather have $100 in a month or $110 in a month plus one day. All responses say the latter. Then, they are asked if they would like $100 today or $110 tomorrow, and a large majority answer $100 today! What is going on here?”

Like so many examples of supposed irrational behavior, this experiment shows only that the researchers need to get out in the real world more often. The two scenarios are not even close to being equivalent. Take the first case: some stranger with a clipboard coming up to you at the mall, promising you money if you come back later. The $100 and the $110 both (a) cost you the time, bother, and gas money for a return trip to the mall in the future, and (b) involve a gamble on the person actually showing up as promised. So, the choices being otherwise equivalent, you might as well go for the higher amount. In the second scenario, however, you have an option that involves no risk of being stood up and no work on your part. Who in their right mind wouldn’t take the sure $100 over a return trip tomorrow that might net you a mere $10 more - or might leave you with nothing? If the average micro-economist really doesn’t see the difference in these scenarios, it’s no wonder the economy is in the toilet.
- timconstan
  
  I have to admit I had the same thought regarding this particular experiment, but don’t miss the forrest for this tree. There’s a much larger point here.