A brief guide
Practical Project Risk Management
SERIES ARTICLE
By Martin Hopkinson
United Kingdom
Purpose
Understand the effects of common mental short cuts (heuristics) on risk estimating. Note that this is a complex and evolving field and that the many and various heuristics identified by research can have overlapping effects. This guidance sheet focusses on those that I have generally found to be the most useful to understand in the context of project risk.
The adjustment heuristic
A range of values (e.g. of risk impact) is estimated by making adjustments from a single point, which may be a pre-existing single point estimate. A single point estimate may be referred to as the anchor. The heuristic causes the estimator to focus on the scenario associated with the anchor estimate and thus fail to take sufficient account of other possibilities. The effect is to produce estimates that are unrealistically narrow. If, moreover, the anchor is, itself, biased the overall risk estimate will be similarly biased; an effect known as anchoring bias.
The adjustment heuristic may be the most important factor behind the phenomenon of almost all people, including experts, making three-point estimates that are too narrow. See the Three-Point Estimates guidance sheet (Nov 2022) for an approach that counters this.
The availability heuristic
The estimating process is dominated by the information that is foremost in the estimator’s mind. Typically, the effect of this heuristic is to foster unjustified confidence in the information concerned, thus acting as an unconscious obstacle to considering other possibilities. When making estimates for risk, examples of the source of such information might include baseline planning data, a subjective guess made on the basis of inadequate description of the risk involved or a suggested value from a manager who is minded of the advantages of either high or low risk estimates.
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Editor’s note: This series of articles is by Martin Hopkinson, author of the books “The Project Risk Maturity Model” and “Net Present Value and Risk Modelling for Projects” and contributing author for Association for Project Management (APM) guides such as Directing Change and Sponsoring Change. These articles are based on a set of short risk management guides previously available on his company website, now retired. For an Introduction and context for this series, click here. Learn more about Martin Hopkinson in his author profile below.
How to cite this paper: Hopkinson, M. (2024). The Effect of Heuristics on Risk Estimates: A brief guide, Practical Project Risk Management series, PM World Journal, Vol. XIII, Issue VI, June. Available online at https://pmworldlibrary.net/wp-content/uploads/2024/06/pmwj142-Jun2024-Hopkinson-Effects-of-Heuristics-on-Risk-Estimates-briefguide.pdf
About the Author
Martin Hopkinson
United Kingdom
Martin Hopkinson, recently retired as the Director of Risk Management Capability Limited in the UK, and has 30 years’ experience as a project manager and project risk management consultant. His experience has been gained across a wide variety of industries and engineering disciplines and includes multibillion-pound projects and programmes. He was the lead author on Tools and Techniques for the Association for Project Management’s (APM) guide to risk management (The PRAM Guide) and led the group that produced the APM guide Prioritising Project Risks.
Martin’s first book, The Project Risk Maturity Model, concerns the risk management process. His contributions to Association for Project Management (APM) guides such as Directing Change and Sponsoring Change reflect his belief in the importance of project governance and business case development.
In his second book Net Present Value and Risk Modelling for Projects he brought these subjects together by showing how NPV and risk modelling techniques can be used to optimise projects and support project approval decisions. (To learn more about the book, click here.)
To view other works by Martin Hopkinson, visit his author showcase in the PM World Library at https://pmworldlibrary.net/authors/martin-hopkinson/
