Project Decision and Risk Analysis


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Project Risk Management and Decision Analysis: Articles and White Papers 

Qualitative and Quantitative Risk Analysis

Page 2

To explain how proper risk management process should help, let’s analyze some physiological issue related to estimations. In 2002, Daniel Kahneman was awarded the Nobel Prize in economics "for having integrated insights from psychological research into economic science, especially concerning human judgment and decision-making under uncertainty.” According to this theory, fundamental limitations in human mental processes cause people to employ various simplifying strategies or heuristics to ease the burden of mentally processing the information required to make judgments and decisions. During the project managers rely on heuristics or rules of thumb to make estimations and manage the project. Under many circumstances heuristics lead to predictably faulty judgments or cognitive biases. 

One of such “rules of thumb” is availability heuristic. Decision makers assess the probability of an event by the ease with which instances or occurrences can be brought to mind. For example, project managers sometimes estimate the chance of risk occurrence based on similar tasks that have been previously completed. If they are making their judgment based on risks they remember, it can cause inaccurate estimation. 

The anchoring heuristic refers to the human tendency to remain close to the initial estimate. For example, during brainstorming meeting engineers estimated the chance of the risks equal 10%. During a discussion they said that actual chance will be between 8 and 12 percent. So they always remain close to the original estimate.

Judgments concerning the probability of a scenario are influenced by amount and nature of details in the scenario in a way that is unrelated to the actual likelihood of the scenario. It is called the representativeness heuristic. For example the project has two potential risks. One of them is very well documented, but another one has a very limited descriptions. Decision maker sometimes may assume, that chance of occurrence of the first one will be higher than second, which in reality may not be the case.


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