Summary of Important Points


Summary of Important Points

Table 4-8 provides the highlights of this chapter.

Table 4-8: Summary of Important Points

Point of Discussion

Summary of Ideas Presented

Project policy for decisions

  • Quantitative decision making is most useful when there is a rational policy for obtaining the outcomes.

  • Rationality, used in this sense, means that the decision is a consequence of all the inputs having been applied systematically to a decision-making methodology.

Decision trees

  • The decision tree is a decision tool to be applied in a decision methodology.

  • The decision tree, and its cousin the decision table, sums up all the expected values of each of the alternatives being decided and makes available the expected values to the decision maker.

  • In applying the decision tree to decision making, the project manager gives consideration to risk by considering both the upside opportunity and the downside risk as well as the expected values of the alternatives.

Decisions with independent conditions

  • It is rare that project managers can make decisions without consideration for other activities or constraints going on in the project.

  • Independent conditions establish prerequisites but do not in and of themselves affect performance thereafter.

Decisions with dependent conditions

  • Dependent conditions affect performance or value. That is to say, the performance in a project work package is conditioned on the first decision made.

Bayes' Theorem

  • p(A | B) = p(A and B)/p(B).

  • The project manager usually is given or can estimate directly one of the three probabilities in Bayes' Theorem. To obtain the other two probabilities, usually another estimate or measurement must be made.

Utility

  • In situations where the decision making takes into account the absolute affordability of an opportunity, we call decision making of this type "risk averse."

  • Utility simply means that the decision maker's view of risk is either discounted or amplified compared to the risk-neutral view.



References

1. Schuyler, John, Risk and Decision Analysis in Projects, Second Edition, Project Management Institute, Newtown Square, PA, 2001, chap. 5, p. 59.

2. Goodpasture, John C., Managing Projects for Value, Management Concepts, Vienna, VA, 2001, chap. 3, p. 39.



Chapter 5: Risk-Adjusted Financial Management

Overview

Value increases when the satisfaction of the customer augments and the expenditure of resources diminishes.

Robert Tassinari
Le Rapport Qualite/Prix, 1985

In Chapter 1, we discussed the idea of the balanced scorecard as one of the business scoring models driving the selection and funding of projects. On every scorecard there are quantitative financial measures that set the bar for project selection and for project success or failure. It is inescapable that project managers will be involved in financial measures and in the financial success of projects. Financial performance in projects, like every other aspect of project performance, is subject to uncertainty: uncertainty of performance by the project team; uncertainty of performance by vendors, suppliers, and partners; and ultimately, uncertainty of financial performance by project deliverables in the marketplace. Uncertainty, we know, is risk. In this chapter, we introduce the financial concepts most important to the project manager, but we introduce them in the context of risk adjustments that are made to provide a more realistic context for measurement and evaluation.