The Risk Planning Fallacy

In a 1977 paper, Kahneman and Tversky identified a cognitive bias that causes project planners to systematically underestimate the execution time, execution costs, and risks associated with their plans. [Kahneman 1977] They called this bias the planning fallacy. By analogy with the bias they found, we can reasonably expect to find a risk planning fallacy that causes risk planners to systematically underestimate the probabilities and impacts of the risks they identify. In an additional twist, the risk planning fallacy causes risk planners to overlook risks in their plans, even though they might easily notice those same risks in the plans of other risk planners.

As Kahneman and Tversky write, "The planning fallacy is a consequence of the tendency to neglect distributional data and to adopt what may be termed an internal approach to prediction, in which one focuses on the constituents of the specific problem rather than on the distribution of outcomes in similar cases." [Kahneman 1979] We can then inquire as to the effect of this behavior on risk planning. There are three ways this behavior can affect risk planning: identifying risks, estimating risk probabilities, and estimating risk impacts.

Identifying risks

Trying to identify all risks that could affect a specific project is an example of what Kahneman and Tversky call "focusing on the constituents of the specific problem." By contrast, to take a distributional approach, we would instead determine in how many projects similar to this project did we encounter a risks that weren't anticipated in their risk plans. Call this question IR-1.

In answering IR-1 we must include all cases of past projects in which an unanticipated risk event occurred. But there are other instances of possibly greater interest. For example, with respect to an unanticipated risk event that did occur, we can ask how many past projects could have been affected by that same risk, but which escaped unscathed because the risk didn't materialize, even though it could have. Call this question IR-2.

Risk planners who don't ask the two questions IR-1 and IR-2 are vulnerable to omitting risk event types from their plans, and not being aware that they might be doing so.

Estimating risk event probabilities

In the singular-focused approach to risk planning, planners devise procedures for estimating the probability of risk events for each risk they've identified.

By contrast, in the distributional approach, planners survey past projects and compare the incidence of risk events to the estimated probabilities their planners calculated. The question to answer is how well the estimated probabilities compare to the actual events. (Call this question EP-1) A related question is how many past risk plans show evidence of measurement of risk event probabilities in projects that preceded them. (Call this question EP-2) Failure to measure risk event probabilities calls into question the procedures past risk planners used for devising estimates of risk event probabilities.

Risk planners who don't research questions EP-1 and EP-2 are vulnerable to underestimating risk event probabilities because they're unaware of the probability of doing so.

Estimating risk event impacts

The impact of a risk event is its effect on business value, often expressed as a numeric value (currency) or a severity level (a number chosen from a discrete list). [Engert 1999] Impact can have multiple dimensions. We can experience impacts on finance, reputation, regulatory compliance, health, safety, security, environment, and more. It's possible for a risk planner to gather data from past projects about the different impact values along these different axes. Call this question EI-1.

Risk planners who ignore EI-1 take a singular-focused approach. They try to estimate severity (or severities) for each type of risk event they have identified for their particular project. Planners who adopt a distributional approach will use the results of researching EI-1 to develop a risk profile from similar past projects, and use that as a basis for estimating the impact of all risks collectively on the current problem.

Last words

Researching the five questions IR-1, IR-2, EP-1, EP-2, and EI-1 for each project plan is a significant burden. Fortunately, much of this work is re-usable from project to project. Assembling and maintaining a library of these results can reduce the cost of this research below the cost of performing it for each project plan. And that can reduce the impact of the risk planning fallacy risk.  Top    Next Issue

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Footnotes

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