by David Ashley
Here’s something interesting. When faced with the choice of avoiding a loss or pursing a gain, most people have a strong tendency of putting energy toward protecting against losses rather than concentrating on increasing gains. This is because losses have a greater psychological impact than do gains of equal magnitude. It’s a theoretical principle referred to as loss aversion. (Ariely D., 2005) (Baumeister R.F., 2001)
Here’s something interesting. When faced with the choice of avoiding a loss or pursing a gain, most people have a strong tendency of putting energy toward protecting against losses rather than concentrating on increasing gains. This is because losses have a greater psychological impact than do gains of equal magnitude. It’s a theoretical principle referred to as loss aversion.
I’ll offer a project management example. After spending a good amount of time and
resources on a project that is not producing the desired outcome, decision
makers tend to keep going the course for the sake of protecting the project
investment instead of ditching the project (accepting the loss) for another
project promising better gains.
Complementary studies on Status Quo Bias indicate that
people largely prefer the status quo over alternative options that have some
uncertainty. The greater the number of available options the greater the volume
of uncertainty and the greater likelihood of staying with the status quo. This
is true even in cases where the status quo is not positive. It generally
requires a disproportionate effort to dissolve uncertainties in alternative
options for the scales to tip in favor of those alternative options. (Samuelson, 1988) (Fleming, 2010)
Overcoming these psychological forces is a challenge in any
project team. Managers should first do
everything possible to avoid getting into these situations. But even with the
best intentions and planning often there is no guarantee that the team won’t
eventually need to deal with the exact situation they were trying to avoid with
all the planning.
What does this mean for project teams? I have two considerations:
What does this mean for project teams? I have two considerations:
1. The most critical decision making happens
early. Since these natural aversions and
biases against change are so strong and difficult to overcome, the importance
of correctly exercising initial decision making processes is all that much more
important early in the project.
2. Risk management skills are essential to reducing
the negative impact of changing direction. Recall that risk management is about
predicting and evaluating both positive and negative events that could happen
during the course of a project. It’s a proactive exercise. Risk management
tools help define these potential events, postulate outcomes, determine the
most promising path, and reduce uncertainty in alternative options. The degree to which uncertainty can be
reduced is the degree to which the effects of loss aversion and status quo bias
can be reduced. Use qualitative and
quantitative measurements to define and reduce uncertainty. Probability and impact matrices will help
rate the importance of risks. The Delphi
technique can reduce bias and help create a consensus. (Institute, 2013)
There is much more to be said about how to make good early
decisions and how to lay out plans to deal with uncertainty should it
arise. There are volumes of books that
speak on these topics, so I won’t go into all that here. But I’ll leave you
with a quote from Henry Ford who seemed to be immune to Status Quo Bias and Loss
Aversion.
Failure is only the opportunity to begin again more intelligently.
- Henry Ford
References
Ariely D., H. J. (2005). When do losses loom larger
than gains? Journal of Marketing Research, 134-138.
Baumeister R.F., B. E. (2001). Bad is stronger than
good. Review of General Psychology, 323-370.
Fleming, S. T. (2010). Overcoming Status Quo Bias in
the Human Brain. Proceeding of the National Academy of Sciences of the
United States of America (pp. 6005-6009). Massachuesetts: National
Academy of Sciences.
Institute, P. M. (2013). A Guide to the Project
Management Body of Knowledge. Newtown Square, Pennsylvania: Project
Management Institute.
Samuelson, W. Z. (1988). Status Quo Bias in Decision
Making. Journal of Risk and Uncertainty, 7-59.
