The Psychology Holding Many Projects Back – and How to Beat It!
Do you hate losing $10?
Does it ruin your entire day?
Research shows losses hurt twice as much as gains make you feel good. It’s called loss aversion and could be holding back your project team.
What is Loss Aversion?
Loss aversion is a tendency to prefer avoiding losses rather than acquiring equivalent gains.
It explains why we feel more pain when losing something than we feel happiness when gaining something of equal value.
Loss Aversion in Project Planning
In project planning, we observe loss aversion as more time and energy spent on economic risk mitigation than invested in pursuing upside potential.
When implementing potential upsides into the project design, we’ve observed that opportunities need to significantly outweigh the risks, often even more than tenfold, before they are even considered.
This can also mean that “poorer” project designs with known risk profiles are prioritized over “better” designs with more perceived economic risk, limiting innovation and driving conservative designs.
Loss Aversion in Project Incentives
Both leadership and shareholders tend to penalize projects for going over timelines and budgets more significantly than they reward projects for beating targets.
A typical example is that many commercial construction contracts include penalty clauses for exceeding the schedule, but they rarely provide comparable incentives for beating the target.
On the surface, risk aversion makes sense: the focus should be placed on driving certainty on cost and schedule estimates, as overruns are detrimental to success especially where additional capital or time is not available.
However, only focusing on minimizing risks and losses can leave a project team blind to realizable upsides and is rarely an optimal strategy.
Win on Your Projects by Overcoming Loss Aversion
Project teams should apply the same level of rigor to pursuing cost and schedule upsides as they invest in risk management to achieve the most successful project outcomes.
Keep in mind that these upsides are often crucial to offset the impact of risks when they do materialize.
Proactively identifying opportunities and making fact-based decisions to lock-in improvements enables projects to much more consistently meet or beat their cost and schedule targets with certainty, well beyond what good risk management alone offers.
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