Embed Size (px)
Citation preview
Innovators Spotlight
Overcoming Optimism
Bias in Portfolio Planning
Today’s Speakers
Yael Grushka-
Cockayne, PhDDarden School of
Business, [email protected]
Tearsa CoatesDecision LensSr. Product Marketing
Decision Lens is a strategic
prioritization and enterprise
resource optimization solution for
critical decision-making in R&D and
capital planning.
Dozens of Leading, Global Organizations Use
Decision Lens for Portfolio Prioritization
The need for prioritization is clear
With Strategic PrioritizationWithout Strategic Prioritization
Innovators Spotlight: Dr. Yael Grushka-Cockayne
6
Optimism Bias in Innovation Portfolio
Planning
Title: Assistant Professor of Business Administration at the Darden School of Business, University of Virginia
Research: Decision analysis, forecasting, project management and behavioral decision making
Journal Publications: Management Science and Operations Research
Affiliations: INFORMS Decision Analysis Society, Project Management Institute (PMI), UVA Excellence in Diversity fellow
Yael Grushka-
Cockayne, PhD
Darden School of
Business, UVA
Overcoming Optimism Bias in Portfolio & Project Planning
Today’s Topic
We will investigate project performance and
the factors that contribute to the planning fallacy.
You will learn techniques to combat
optimism bias, overconfidence and strategic
maneuvering to improve the accuracy of
your forecasted project goals and portfolio selection.
Let’s talk about project performance…
Let’s talk about project performance…
The perils of Planning Fallacy
• Projects cost more, take longer, and deliver less than expected
Planning Fallacy: “The tendency to underestimate task-completion times and costs”
Lovallo and Kahneman, HBR 2003
• 3 times the cost
• Two years late
• 1/3 the size
Constraints on planning and forecasting
Eubanks, Read and Grushka-Cockayne, 2013
Cognitive Biases andBounded Rationality
• Confirmation, overconfidence and anchoring biases
• Optimism Bias and the Winner’s Curse
• Out-of-sight / Out-of-mind
• Parkinson’s Law
Organization and AgencyConstraints
• The “Olympics effect”• Failure to account for
organizational, externalities, and coordinate costs
• Student syndrome and planning to a schedule
• Competitor neglect
• City of New York Department of Parks and Recreation: •1800+ projects (1998 - 2008):
• 50%+ over budget (on average by 48%)
• 55% delayed (on average by 22%)
• UK Construction Industry Data•BCIS: Building Cost Information
Service •808 projects (2003 – 2006)
Comparative case study of optimism bias
• NYC DPR exhibits strong planning fallacy. Forecast/Actual cost ratio below 1, and invariant with project magnitude.
• Practically every project is over budget.
Evidence of NYC DPR’s optimism bias…
Electrical Tree Landscape Plant Pool HVAC Playgrd
Count 106 270 58 167 56 17 152
Average overbudget
$ 31,439 $ 83,905 $ 411,619 $74,188 $ 72,411 $ 77,584 $193,381
Average duration overrun
172.2 -45.6 138.7 -58.2 30.5 269.9 95.5
Planning fallacy extended to time overruns
UK construction data indicates little or no planning fallacy, for either costs or time. Small time overruns are almost constant and invariant to project magnitude.
Optimism bias is not inevitable
• Calls into question universality of the fallacy, and undermines the view that it is {only} due to cognitive bias.
• Project attributes which lead to faulty parameter estimation when the fallacy does occur:
• Size ($)• Type / sector of projects • Lack of experience of the project team
(measured by volume)• Tendering contractor selection process • Procurement systems used
What we learned…
But can we do anything about it?
“[the Rio de Janeiro state
government] said it was
"natural" that some more
work remained to be
done.”
BBC, 2013
Inside View:
• Describing the future as a narrative
• E.g. CPM: Developing a series of steps that leads from beginning to end of a project.• How long will each
task take?• What resources
will be needed?
Outside View:
• Taking a statistical perspective
• Ignores the detail of the case at hand
• Estimating task duration/cost/benefits by asking about previous, similar tasks.
• Reference class forecasting
Kahneman and Lovallo, MS 93
Inside vs. Outside view
1. Select a reference class – previous projects similar on important characteristics
2. From the reference class, assess the distribution of outcomes
3. Identify where your project falls in the distribution4. Assess the reliability of your predictions5. Adjust estimate toward average based on estimate of
reliability
Lovallo and Kahneman, HBR 2003
Outside view / Reference class forecasting
• Over 3000 projects a year
• Major infrastructure projects
• A domain where Optimism Uplift has been routinely applied
• Recent 5-year budget request: £35.7 billion
“We run, maintain and develop Britain’s rail tracks, signaling, bridges, tunnels, level crossings, viaducts and 17 key stations”
60% contingency
Case example: UK Network Rail
• 1595 projects which have cost revision requests (2004-2012)
• Mean earliest Cost estimation: £16.1million
• Mean late Cost estimation: £39.8 million
• Revision requests are always approved (subject to gathering additional information)
• No past accuracy or performance is reported
• Risk factors are assessed and uplift is applied
Case example: UK Network Rail
• Development of an improved method of outside-view forecasting with UK Network Rail and HR Treasury
• Combine aspects of wisdom-of-crowds, case-base reasoning and reference class forecasting
• Investigate the impact of additional project attributes (# of tasks, size of organization, project planning method, etc.)
What’s next?
Learn more about portfolio optimization and
prioritizing investments for higher returns
See Decision Lens in Action
www.decisionlens.com
Videos, Research, and Resources
R&D: innovation.decisionlens.com
Capital Planning: capitalassets.decisionlens.com
Join Portfolio Thought Leaders on LinkedIn
R&D: Leaders in R&D Portfolio Strategy
Capital Planning: Leaders in Capital Planning
• Daniel Kahneman and Amos Tversky, “Intuitive Prediction: Biases and Corrective Procedures,” in TIMS Studies in Management Science vol. 12, eds. Spyros Makridakis and Steven C. Wheelwright (Amsterdam: North Holland, 1979), 313–327.
• Dan Lovallo and Daniel Kahneman. 2003. “Delusions of Success: How Optimism Undermines Executives’ Decisions”, Harvard Business Review, 56–63.
• Bent Flyvbjerg, “Delusions of Success: Comment on Dan Lovallo and Daniel Kahneman,” Harvard Business Review, December 2003, pp. 121–122.
• Yael Grushka-Cockayne, “New York City Department of Parks and Recreation”, Darden Business Publishing Case Study, UVA-QA-0815.
References
Prioritize the portfolio by your values
A ranked list of projects based on the strategic goals and priorities of
your organization.
Compare scenarios to decide what’s best
Compare different funding allocation scenarios with project
prioritization results.
Get deeper insights with visual analytics
Uncover potential opportunities or problems with visualizations.
Balance resources for successful execution
Zero-in on bottlenecks in time, resources, or scheduling before they
occur.
