FEATURED PAPER

Analysis vs. Illusions in Project Management

Lev Virine, Ph.D., P.Eng.; Michael Trumper;
and Eugenia Virine, PMP

Canada

Structured analysis of the situation helps project managers to overcome illusions can improve their judgment. However, more likely than not, prior to making a decision people have not performed any structured analysis, or they misinterpret the results of the analysis. Complicating matters, sometimes the analysis is extremely complex and results may be incorrect. Even if the analysis is performed and is correct, often people do not realize its value. As a result, even now where we have highly trained experts with access to powerful computers, running the most advanced mathematical models, we still bear witness to the outcome of so many poor quality decisions.

Why people don’t perform even simple analysis?

On September 15, 2008, the Lehman Brothers filed for Chapter 11 bankruptcy protection following the massive exodus of most of its clients, drastic losses in its stock, and devaluation of its assets by credit rating agencies. Why did one of the largest and oldest financial firms with $691 billion dollars in assets collapse so rapidly? Superficially, we have been told that their heavy investment in subprime mortgages and associated derivatives were the catalyst that set off the fall of Lehman Brothers. But how did their army of highly educated MBAs and powerful financial models fail to foresee this risk and communicate the threat to the decision-makers at the helm of Lehman Brothers and other related financial institutions to do something it? Sadly, the truth is that the senior management of Lehman Brothers, particularly CEO Richard Fuld, was well aware of the subprime mortgages problem having being warned on multiple occasions, but they deliberately chose to ignore these warnings. Moreover, the management carried on a campaign to silence individuals who talked about these risks (McDonald and Robinson 2009). Was this arrogance, ambition, greed, or something else?

Lehman Brothers worked within a framework of government regulations. Government, in this case the Federal Reserve, is supposed to ensure that financial crisis like the subprime meltdown should never happen. Did they (the Federal Reserve) see the danger of the type of financial practices associated with sub-prime mortgages? Apparently yes, but for a long period of time they believed that the problem associated with subprime mortgages would be localized and could not bring down the entire economy (Wessel 2009). Macro-economic analysis is not trivial like simple arithmetic, but surely the Federal Reserve with its significant resources, expertise, and mandate to oversee economy would be able to foresee the unintended consequences of the financial decisions that were being made by the major US financial institutions. As it turns out they did make mistakes and there are at least three reasons for this.

In complex situations when potential issues are identified, it is generally obvious that an in depth analysis would help decide on a proper course of action. Low quality decisions are usually the result of:

1. No or insufficient analysis performed. This is common in many projects, but not in a case of Lehman Brothers and Federal Reserves.

2. The analysis is partially or completely incorrect. In our example, the analysis was probably partially correct. Economists, as in both the Federal Reserve and Lehman Brothers, create very complicated mathematical models; however, these models often cannot account for novel or emerging economic processes, in this case the combination of derivatives and the subprime mortgages.

3. Decision-makers amend, ignore, misinterpret or overwrite results of analysis. This is what mostly likely happened at Lehman Brothers.

Financial organizations, like Lehman Brothers, as well as the Federal Reserve are not run by computers (though given recent events it may be not so outrageous an idea), they are run by people who have the discretion on whether or not to accept the recommendations that come from an analysis. As we learned before, people’s perception of reality is subject to illusions. People are often under the illusion that analysis is either not necessary or their judgment is better than the direction provided by the analysis. Here is a paradox:

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About the Author Lev Virine, PhD Co-Author Lev Virine, PhD, P.Eng,is  Manager of Software Development at Intaver Institute Inc in Calgary, Alberta, Canada.  He has more than 20 years of experience as a structural engineer, software developer, and project manager. In the past 10 years he has been involved in a number of major projects performed by Fortune 500 companies and government agencies to establish effective decision analysis and risk management processes as well as to conduct risk analyses of complex projects. Lev’s current research interests include the application of decision analysis and risk management to project management. He writes and speaks to conferences around the world on project decision analysis, including the psychology of judgment and decision-making, modeling of business processes, and risk management. Lev received his doctoral degree in engineering and computer science from Moscow State University. Lev Virine may be contacted at lvirine@projectdecisions.org.

About the Author Michael Trumper Co-Author Michael Trumper is a business development manager of Intaver Institute Inc. – Calgary based vendor of project risk management software. Michael Trumper has worked in the fields of technical communications, marketing, and software development for the past 16 years. Over the past eight years, he has been involved in projects involving economic valuation and risk and project lifecycle modeling. Michael Trumper is an author or co-author of many papers and one book of project decision and risk analysis. Michael holds a bachelor’s degree from the University of Victoria. You may reach Michael Trumper at mtrumper@projectdecisions.org

About the Author Eugenia Virine, PMP Co-Author Eugenia Virine, PMP, is a senior manager for revenue development at Greyhound Canada. Over the past 10 years Eugenia has managed many complex projects in the areas of transportation and information technology. Her current research interests include project risk and decision analysis, project performance management, and project metrics. Eugenia holds B. Comm. degree from University of Calgary.