Applying Nobel Prize winning economic theory to program and project management

nobel prize

Congratulations to Richard Thaler on winning the Nobel Prize in Economics (also known as the Sveriges Riksbank Prize in Economic Sciences) earlier this month. Thaler was recognized for his ground-breaking work in behavioral economics, which led to the bestselling book Nudge, about how organizations and governments can use these new techniques to bring about better outcomes for policy and strategy.

But how can Thaler’s insights into economic behavior be related to program and project management? And how then can we use the application of these insights to lead to better performing projects and programs?

Thaler’s contributions stretch across three major areas:

  • Limited rationality: He showed that humans feel loss far more than gains (i.e. a $10 loss is felt more keenly than a $20 gain). Moreover, he demonstrated a concept called the endowment effect, under which humans value something more just because they own it.
  • Social preferences: Thaler showed that the concept of fairness is important to humans making purchasing decisions. For example, organizations that raise prices without a ‘fair’ rationale would be penalized by consumers (e.g. price gouging in times of shortage).
  • Lack of self-control: Thaler also showed how humans employ a planner-doer mental model. It is this constant tension between planning something and doing something that can often be expressed as a lack of self-control. By ‘nudging’ the better option, governments and organizations can help people exercise more willpower.

Because Thaler deals with humans making decisions, the application of these principles to program and project management is not such a large leap to make. Just as economists recognize that humans don’t follow the standard model of perfect rationality in their day-to-day decision-making, so too should program and project managers recognize that their projects don’t always follow standard delivery methodologies.

Below are some suggestions in which the application of behavioral economics could improve our program and project management capability.

  • Limited rationality:
    • How often do Project Boards more keenly the feel the loss of a single item of functionality than they do the great work the team has taken to produce 50 similar items? Can we re-frame this loss?
    • How often do users value functionality that they will lose in the new system, far greater than the myriad of new functions that become available in the new software? How can we ensure users view the system as a whole?
  • Social preferences:
    • How often do clients query change control or project variances because they weren’t introduced in a ‘fair’ manner, or had unfair (or high) pricing attached? How can we legitimise change control procedures in the eyes of the organisation?
    • How often do team members get distracted and become less effective because decisions are not taken in what they perceive as a ‘fair’ manner? How can we improve team perception of fairness?
  • Lack of self-control:
    • How often do programs spin out of control? Here we can easily view the lack of self-control – the constant battle between planning and doing, as equating to “governance” in the PMI or MSP framework? How can we get all stakeholders to accept a governance model?
    • How often does an emphasis on doing mean that a program lasts far longer than necessary? How can we bring the focus back to planning?
    • How often does a lack of succession planning, or transition planning, mean that there is no incentive to complete the program and, as a result, the work continues inexorably? How can we incentivize the ending of a program?

Calls to Action

The first call to action is for further research on behavioral economics within program and project management. The next generation PMBOK or MSP should include these aspects.

Secondly, all PMs need to better understand the emotional and behavioral context of decision making and, therefore, be discerning in the application of rational project management methodologies, as opposed to understanding the emotional context.

And finally, there should be a call for more self-control, for more governance. We know from Thaler that creating ‘choice architectures’ (or ‘governance models’ in project language)  allows better planning, which in turn leads to more effective doing. Lets apply that to our programs and projects.

RELATED LINKS

Extending the Scrum framework for better project management

How great project management could lead to a great sales cycle

The Industrial Webolution, Part 2: Power and Economics

Comments

  1. Dan Russon says:

    Great post. I’ve been applying insights from behavioural science to change initiatives for a few years now and have found the EAST and MINDSPACE mnemonics to be the most practical tools – both outlined in David Halpern’s great book ‘Inside the Nudge Unit’ – not directly related to PM but makes nudge theory very accessible and easy to apply to any change scenario – helps you to work with rather than against natural human behaviour when you understand the biases that influence decision making.

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Trackbacks

  1. […] neuroscience of settling for less is pretty interesting in a world of consumers who usually want more than what they pay […]

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