Recent events allowed me to catch up on light reading and I found myself going through “Sway - The Irreresitable Pull of Irrational Behavior” by Ori and Rom Brafman. The book is a generally enjoyable light read, but it delved into one topic I found very fascinating: irrational loss aversion.

The authors first introduced the topic with a simple economic study, the impact the changing price of eggs had on sales. The researchers found that consumers were more sensitive to prices increasing than decreasing. The impact of a loss - in this case due to price increases - was 2.5 times more profound than the impact of a gain (Putler, 1992) . Quite simply, people do not rationally weight losses properly and as such this leads to irrational behavior.

This concept was then applied to numerous examples such as one of KLM’s premier captains flying his 747 down a foggy runway into another plane because he was facing a flight delay and didn’t yet have tower clearance or a financial adviser explaining how many of his clients are unwilling to sell a poor performing stocks once it is below the price they bought it at, even if the most likely outcome is that the given stock will continue to drop (Brafman, 2008). Individuals fear of REALIZING a loss that has already occurred causes them to take on additional risks that are not rational. Perhaps the best, example offered was the $20 bill auction conducted by professor Bazerman at Harvard. At the beginning of each semester he offers an auction for a $20 bill starting at $1. There is a twist; the 2nd highest bidder must honor their bid, but gets nothing. As the price moves closer to $20, two bidders will become locked into a bidding war as each person hopes to outbid the other, thereby avoiding the $20 loss. Professor Bazerman has indicated that the bidding has gone as high as $204. This idea of risking more to make up a loss is not uncommon. In your own life, think of the last time you were driving somewhere and were running late. Did you drive faster or more aggressively than you would normally?

While the authors did not explicitly apply this dynamic to large projects, I can certainly see how this dysfunction has played out in projects I’ve been on. In fact, it seems the nature of a traditional waterfall project would be quite prone to this irrational loss aversion. Imagine for a moment a project broken evenly into three major toll gates for requirements/design, construction and testing. Now imagine for a moment that the first face is coming to a conclusion, but the design is not quite nailed down, or an extra week is required. Traditional project management would say that one would communicate the schedule slippage and move the date out. My own real-life experience has been that people will say, “we’ll just make up the time!”

One of my friends in QA has frequently pointed out that the nature of his job as a QA professional means that he’s “the last one to go and the first one to be cut” implying that that traditional projects generally run longer through their earlier phases, in turn placing extreme pressure on QA to make an original date. I would like to say that when I used to work on waterfall projects I was strong enough to resist this dynamic, but sadly I was not. On several occasions, the siren call of “making the date” lured me too close to the treacherous rocks that have shipwrecked many vessels.

Somewhere deep in our psyche is a fear of loss, and with the modern large-scale waterfall development projects we have put together a system for delivering projects that basically plays to this fear. Is it any wonder we see massive projects go way over budget and yet continue to go forward? Like the ambitious MBA student looking to avoid the $20 loss, there are too many examples of companies throwing good money after bad to avoid ending what has already become a disastrous project. One client I recently worked with had just concluded a massive, two and a half year project only to realize that the cost to maintain this newly developed product was so high it could never be sold at a profitable margin.

The iterative nature and value of frequently delivering production ready code certainly help to mitigate this dynamic in an Agile environment, but I would not pretend that the same pressures don’t exist. I know I have seen business executives simply assert, “we must get everything done by this date”, expecting the team to find a way. Just because one works in an iterative way, doesn’t mean we are really open to evaluating our progress and make adjustments. From a project management point of view, we can refer to the triple constraint and inquire what is the lowest priority: cost, schedule or scope? In the unfortunate case where project sponsors are not willing to entertain such a trade off, then one must move to a discussion about risk - or reduced quality - and how much the program is willing to take. The best course of action is to surface these subconcious tensions that may be playing out. While we may not want to be the bearers of bad news, it is far better to escalate an issue when people still have options than when it is too late to do anything. Also, if we accept people are inherintly adverse to realizing a loss, the team may be much more willing to walk away from a small train wreck of a project, rather than a larger one they would be even more invested in. Unfortunately my experience has shown that the most likely, and worst, possible option is to shoulder the risk oneself and subscribe to the fallacy that it is our job as project managers to manage risks like this. Of course, now the stakes become higher as we continue to bid more and more for that $20 bill.