Sunday, March 31, 2013

Change v Risk

You probably know this already: Managing change and managing risk are often two sides of the same coin: every change carries risk, and every risk portends a change if the risk event really comes to pass.

Most of us know this also: Managing risk and change requires some understanding of -- and experience with -- the cognitive psychology that underlies each.
Cognitive psychology is about mental processes, to include how people think, perceive, remember and learn.
Disclosure: I am not a psychologist! Fair enough (and pressing on.. )

The psychology of risk
We understand a lot about the psychology of risk: read Daniel Kahneman's tome "Thinking, fast and slow" as perhaps the one best book ever written on the thinking mannerisms and processes that underlay our mental processing of risk.

Kahneman certainly discusses the consequences of change = f(risk); and risk = f(change), but his main focus is on risk per se.

Of the many ideas discussed by Kahneman, the one that is head-and-shoulders the most important for project management is prospect theory, the idea that our feelings about risk and change (i.e. about our prospects) are influenced by our current status (called the reference point by Kahneman).

For project managers, we can use these principles from prospect theory as risk management tools:
  1. Perceive risk: Our perception of risk impact or probability is not linear nor objective (our perception is not time stationary either, but that's not a property of prospect theory), meaning:

    we really don't make decisions on the basis of expected value (impact x probability), thus invalidating most of what PMs put on a conventional risk register. We make decisions on some idea of "weight" x impact, where weight is almost never the same as probability.
  2. Favor certainty: We favor certainty over uncertainty and will thus pay many times the expected value of the risk to make it go away, thus validating point 1 (See: insurance as a risk response, and mitigating rare but calamitous impacts). Insurance is priced as weight x impact, but it's cost is probability x impact. The latter is always less than the former, thus generating profit for insurance. 

  3. Fear losing: We fear/regret/mourn losing what we have, and will defend our current status (reference point) more vigorously than it objectively requires. (See: work package manager who will not give up any budget once allotted) 

  4. Where you stand depends on where you sit: The reference point counts for more than the final (objective) outcome: less rich is  unsatisfactory whereas less poor is gratifying, even if the rich and poor outcomes are the same. (See:under promise and over deliver strategy)  
Thus, imaging that we think of impacts and probabilities objectively on an absolute scale is really quite wrong: we adjust to our current position, and we do this almost unwittingly. Consequently, the truly rational decision maker is really a fiction.

The psychology of change
I haven't found a comparable book on the psychology of change (comments invited!), though the subject is discussed thoroughly in articles and white papers, and numerous books as well.

Perhaps one must start with Festinger's coinage of his mid-1950's theory of cognitive dissonance: the discomfort felt when processing two conflicting beliefs, ideas, or directions.

Certainly if the project or the business is out to change the culture in some material way, many will be bewildered by the disharmony of the two competing value systems: culture as we know it; and culture as the powers-that-be want it to be (or change to)

However, we do know that most of the principles of prospect theory can be reworded slightly and applied to change management. For example, if change is slow enough to be absorbed and internalized, it's like moving the reference point slowly: slow enough such that we don't really mourn a loss or fail to absorb an opportunity. (See "boiling the frog" scenario). And if change is too quick or too impactful, we just want it to go away!

Risk v change examples
So, let's see how this might work in day to day projects
  • Changed requirements: There's a very small chance that in a few weeks/months there will be a baseline change to accept a modified deck of requirements to satisfy a new customer/market/sponsor.
    Although the expected value (chance x impact) is very small, we are willing to put down options now to protect the change opportunity. (An option is a down payment, sunk cost if you will, toward a change).
    The option, in the form of prototypes, analysis, temporary interfaces, or hooks, may cost many times the expected value of the change (risk), and the option is sunk cost -- not recoverable if the option is not exercised.
  • Changed budget: In the baseline plan, work package manager A (WPM-A) has a budget of $50K; WPM-B has a budget of $75K.
    For any number of reasons, the operating plan at some point requires a different allocation of resources than the baseline: in budget change control, WPM-A gains $15K, and WPM-B loses $10K of his/her reserve, so that they both have $65K in the operating plan.
    Each has enough for their scope of work. B's change is 33% less than A's change, but B is really torqued, whereas A is very happy, and they are both at the same (new) reference point. They just got there differently.
So, enough already. The points are obvious if you've read to this point: expected value drives very few decisions of material import; decisions rarely are made on strictly objective criteria; and there's not a lot of psychological difference between the biases that influence risk from those influence change.

Check out these books in the library at Square Peg Consulting