## Thursday, February 7, 2013

### On barbells and risk

Barbells have two weighted ends and a middle connecting them. In general, each end weighs the same with perfect symmetry, but it doesn't have to be that way. It's possible to make an asymmetric barbell that favors the heavier end.

There's risk in every opportunity, and opportunity in every risk -- something like a barbell -- with O on one end and R on the other, and circumstances and other events/impacts that connect them.

But there's rarely symmetry between the O and R in spite of such phenomenon as 'regression to the mean' and 'central tendency' that tend to wash out the to and fro of random impacts, leaving a nice bell shape around some average outcome.

Prospect Theory
We know from Prospect Theory that we are more fearful of losing what we have than we are non-fearing of an opportunity to do better. The fact is: fear sells! And, more often than not, we're buyers.

Do this... or be damned (or, at least be in danger of screwing up)! And then we're presented with a long list, whether from the pulpit, politics, or projects.

Barbell strategy
And so, we come to the Risk-Opportunity  barbell strategy. To protect the baseline, the plan, the current earned value we put most project resources into controlling any threat to losing or backsliding. Fair enough. As PM's were're more disposed to be conservative, or are we?

We almost always come up with an asymmetrical three-point estimate for risk propositions, and we almost always make the mistake of planning for the most likely outcome; because, as shown in the figure, the most likely is on the optimistic side of the asymmetry, in violation of prospect theory.

But so far this all about risk; shouldn't we put some resources toward opportunity? Certainly not as much as toward containing risk, but why fore go the opportunity embedded in each risk? This is our barbell of risk... some resources toward O with most resources directed toward R.

Options for O
One way to work the opportunity is with options: we put a little bit down to reserve a future decision to take advantage of an opportunity when the time is right, if ever. The down payment is sunk cost, but an affordable loss; we don't get it back no matter what we do. It just gives us a right -- but no obligation -- to take advantage of an event/condition/situation if it arises. In effect, we've formed an "event chain" with a future decision opportunity (fork in the road) planned in.

But the opportunity may be all but unlimited; we're only risking the cost of a reservation.

When would we do this in the project domain?
• When resources are scarce and we need to reserve capacity
• When technology is uncertain and we need to protect an option to go a different direction
• When a contractor is unproven and another may be needed
• When regulations may be changing
• When sponsors/markets/competitors are changing and we need to protect alternatives.