As a timely follow up to the excellent set of posts about cognitive biases written by guest writer Paul Gibbons, the UK’s National Audit Office (NAO) has just published a report that illustrates how the “optimism bias” and other dysfunctions can distort key investment decisions.
The decision to proceed with a project and decisions about how to approach it, are some of the most challenging needing to be made. These decisions are among the first to be made and occur at a point in time at which our knowledge about the project is at its lowest. Such a situation means that unless we are vigilant, cognitive biases, politics and personal agendas can easily displace hard knowledge, verified data and expert judgment as the basis of decision.
A recent investigation by some of my students in the University of British Columbia MBA program illustrates the point. Their survey of managers indicated that as many as 45% of those involved in making such decisions had knowingly understated what they believed to be the true costs and/or overstated the likely benefits in order to get a project approved.
The NAO’s “Over-Optimism in Government Projects” report investigates the causes of this “strategic misrepresentation” and provides some interesting case studies that illustrate the effect. The report points out that in many organizations the “incentives to be over-optimistic are very strong, and disincentives relatively weak”. In addition the report notes that “decision-makers seek short-term recognition and rewards, and are often not in the same role when the project is under way and issues emerge”. Although written from the perspective of government projects, these are two elements that I think are true in many corporate projects as well.
The report makes for some interesting reading and provides a number of quantified examples to illustrate the point. For example, according to the report when putting together a business case for its “Mortgage Rescue Scheme” the Department for Communities and Local Government failed to adequately test its assumptions or make enough use of available information. In addition, the business case contained little sensitivity or scenario analysis that would have explored a range of possibilities rather than a single projected outcome. In the end, the average cost of each completed rescue was £93,000 compared to £34,000 anticipated in the business case.”
One interesting detail in the report relates back to an issue I have been talking to people about for a number of years. According to the report: “too often, government commits to a ‘solution’ without fully understanding the context and exploring alternative options to determine which solution matches the real need”. This “first option adoption” problem is something I see in many of the troubled projects I review and a trap all decision-makers need to be cognizant of as they make their key decisions.
One place where the report could use further depth is on the issue of how to prevent or at least discourage, strategic misrepresentation. The report does suggest that there should be independent challenge of decision-makers and touches on the importance of clear personal accountability. Those are both good starting points, however in my experience the problem is often deeply seated in the culture of the organization. In the rush to move forward naysayers are shunned and optimists rewarded. Independent challenges are a good thing, but unless the management structure strives for balanced decision making and level headed thinking, optimists will still find a way to ride roughshod over any who stand in the way of their pet project’s progress.
- Over-optimism in government projects
- NAO Guide to Initiating successful projects
- Cognitive biases and leading change: Part I
 – Project Confessions: Project Governance and Oversight research BASC-521 – Chasles, Klug, Wood, Puaux, Spedtsberg