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Ramblings on Risk Assessment and Projects February 22, 2012

Posted by Edwin Ritter in Project Management.
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Behaviorial studies prove we have a natural tendency to avoid risk. I want to refer again to Malcolm Gladwell  and present the following scenario. You have $300.00 and are presented with 2 choices.

  • A) You can receive another $100.00 or
  • B) Toss a coin and if you win, you get $200.00. If you lose, you get nothing.

Most people prefer A. They tend to go for the sure thing and avoid the 50% risk of getting nothing. Even though there is the potential to get 2X if you win.

Now consider this scenario. You now have $500.00 and have 2 choices.

  • C) Give up $100.00 or
  • D) toss a coin and pay $200.00 if you lose. If you win, you pay nothing.

All the choices (A,B,C,D) have equal probabilities. In his New Yorker column, Gladwell wrote “… we have strong preferences among them. Why? Because we’re more willing to gamble when it comes to losses, but are risk averse when it comes to our gains. That’s why we like small daily winnings in the stock market, even if that requires that we risk losing everything in a crash.” (Ed. Note – emphasis added)

Assessing the severity of a risk happening (or, not happening) is a key skill for project managers.  When evaluating a risk on a project, be aware of the bias to gamble on the loss rather than the gain. We look for ways to mitigate risks.  When a risk does happen, it creates chaos, can jeopardize a project and requires additional work to resolve. Communicating with your team, stakeholders and client(s) is crucial during this time. As a project manager, you must identify and define potential solutions (among them – do nothing). Some events are  ‘acceptable risks’. Typically, the sponsor(s) and stakeholders will determine what is or is not acceptable. Depending on the situation and the client, they may also determine what is acceptable.

Have you noticed how you are risk averse? What are effective risk management strategies you use?