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Estimating and Forecasting Biases in Projects - Part II
September 2, 2008 | Author: PM Hut | Filed under: Project Management Musings, Scheduling
Estimating and Forecasting Biases in Projects - Part II (#3 in the series Choosing the Wrong Portfolio of Projects)
By Miley W. Merkhofer
People are notoriously poor at estimating and forecasting. They interpret statistical correlation as implying cause-and-effect. They tend to naively extrapolate trends that they perceive in charts. They draw inferences from samples that are too small or unrepresentative. They routinely overestimate their abilities and underestimate the effort required to complete difficult tasks. Estimating and forecasting biases are a special class of biases important to project-selection decision making.
Anchoring
Another relevant bias is anchoring. Initial impressions become reference points that anchor subsequent thoughts and judgments. For example, if a salesperson attempts to forecast next year sales by looking at sales in the previous year, the old numbers become anchors, which the salesperson then adjusts based on other factors. The adjustments are usually insufficient.
Dramatic or easy-to-recall events often become strong anchors. For example, the vividness of the horrible events of September 11 caused many to view airline travel as too risky, but many experts believe that travel has never been safer.
Motivational Biases
Various motivational biases also lead to forecasting errors. The nature of the effect can depend on the individual. For example, project managers who are anxious to be perceived as successful may pad cost and schedule estimates to reduce the likelihood that they fail to achieve expectations. On the other hand, project managers who want to be regarded (consciously or unconsciously) as high-performers may underestimate the required work and set unrealistic goals. Most managers are overly optimistic. For example, when companies collect data on the financial returns from projects, they almost always find that actual returns are well-below forecasted returns.
Miley W. (Lee) Merkhofer, Ph.D., is an author and practitioner in the field of decision analysis who specializes in assisting organizations in implementing project portfolio management. He has served on advisory panels for several government agencies and has received grants and research awards for work in the area. Lee is an editor of the journal Decision Analysis.
Prior to becoming an independent consultant, Lee was a Partner of PriceWaterhouseCoopers, where he founded that organization’s capital allocation and project prioritization business practice. Lee is a founding partner of Folio Technologies LLC, a provider of web-based, project portfolio management software.
Lee received his Ph.D. in engineering economic systems from Stanford University. He is the author of the book Decision Science and Social Risk Management and co-author of the book Risk Assessment Methods..
Additional papers on project portfolio management can be found on Lee’s website, www.prioritysystem.com. E-mail: lmerkhofer@prioritysystem.com.
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