EVM Training – Decision Making & Charlie Munger – Part 2 – Tendency Toward Misjudgment

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EVM Training - Decision Making & Charlie Munger - Part 2 - Tendency Toward Misjudgment

Tendency Toward Misjudgment – Part 2

Tendency Toward Misjudgment

In part 1 of this topic we learned about Charles (Charlie) T. Munger, Vice Chairman of Berskshire Hathaway and partner of Warren Buffet and his listing of 25 innate human tendencies toward misjudgment that we harbor. I went through each of the 25 “tendencies” that are defined and discussed by Charlie and tried to think about how the tendency could disadvantage or could potentially aid decision making.

Decision-Making is Critical

Humphreys & Associates emphasizes in its EVM training material that the process of decision-making is critical, and I was greatly pleased to learn that Charlie thought that same way. In the first part of the blog we discussed just two of the list of tendencies Munger provided. It appears we humans are fraught with innate tendencies that, if not blocked, can lead us to make a misjudgment. A misjudgment would be a wrong decision in terms of this blog. With all that follows in the blog about misjudgment, we are trying to discern a sound process for decision making, with tools like decision trees, that can help avoid or counter the influences of the counterproductive tendencies. Developing your decision-making process should involve findings tactics that help you avoid or defeat or neutralize these tendencies in your processes.

Liking/Loving Tendency

Tendencies #2 and #3 are total opposites but very much related. Tendency #2 is called the “Liking/Loving Tendency.” It should be familiar to us all. The foundational notion is that people seek affection and approval. Maybe not all people do this, but it is a basic human tendency and we believe that most people have it. This tendency can be a problem when it gets in the way of rational thinking; for example, if people on your team ignore faults of people they like then how will they fairly evaluate proposals floated by those they like? What about when they favor the products, actions, or ideas of those they like? People may not even consciously understand the underlying bias is operating in any given situation, so we need to find a way to circumvent this tendency when we are processing a decision. We need to make a neutral playing field in order to get a fair evaluation.

Disliking/Hating Tendency

Tendency #3 is the opposite of that. It is the “Disliking/Hating Tendency” that can motivate people to ignore or devalue the works or opinions or ideas of those they dislike simply because they do not like the person. This tendency can be strong enough to lead to distortion of facts or judgment. Maybe you have worked with someone that you have strong negative “feelings” about. Can you remember that and imagine if you had that bias operating in a decision-making environment? Maybe the negative tendency toward bias would be operating below the conscious level just far enough to be influencing them, but without their understanding. They sincerely think they do not like the idea and that has nothing to do with the person posing the idea. Our problem is to devise a decision-making process that can work in the face of such underlying, and perhaps invisible, motivations.

Doubt/Avoidance Tendency

Tendency #4 is unrelated to those two. It is the “Doubt/Avoidance Tendency.” That is our tendency to avoid being in doubt and our penchant for moving to certainty. This can be a powerful motivator to move to a quick decision; perhaps before all the homework of deciding has been accomplished. It is human nature to make quick decisions and certainly we can understand that hasty decisions may not be the best decisions. This tendency can potentially rise to the level where it creates irrationality and the pressing need to remove doubt. Unfortunately, this tendency becomes stronger when we are under pressure; that means just when we need to be at our level-headed coolest and most deliberative, unfortunately, our motivation is to just make a decision and get on with it to rid ourselves of doubt. Again, our challenge is to not let this tendency dictate our decision-making process. A little pressure can be a good thing. Too much pressure, along with the unchecked tendency to want to move quickly away from doubt, can be ruinous.

Curiosity Tendency

Perhaps tendency #6 can help us here. This is a beneficial tendency of human nature; the tendency to be curious. Charlie Munger simply called it the “Curiosity Tendency.” It is our nature to be curious and that curiosity has brought humankind from the cave dwellers to the high-rise dwellers. If we can harness that tendency in our decision-making process, maybe it will help counter some of the negative and damaging tendencies. Maybe our curiosity will want to lead us to getting the facts before we decide emotionally.

Hopefully you get the idea now. The first two blogs together have not covered the entire list of tendencies; far from it. When things permit, the rest of the list developed by Charlie Munger will be presented here in terms of the process of decision-making. Meanwhile you can certainly look at your decision-making processes at work and maybe even at home to see if you have planned to subvert these tendencies.

Review EVM Training – Decision Making & Charlie Munger – Part 1

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EVM Training – Decision Making & Charlie Munger – Part 1

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Large Radio Antenna with Dawn Sky in the Background image for EVM Training - Decision Making and Charlie Munger blog post

Tendency Toward Misjudgment – Part 1

Charlie Munger and EVM Training

So, what does Charles (Charlie) T. Munger, Vice Chairman of Berskshire Hathaway and partner of Warren Buffet have to do with EVM training? Decision Making.  You can imagine the big-money decisions he has helped Buffett make during the many years of building up the legendary outfit. Along the way, he kept track of the happenings around him that through various speeches and writings espoused some clear thinking. Born in Omaha in 1924, Charlie began working with Warren at Buffett & Son, a grocery store owned by Warren Buffett’s grandfather. Eventually graduating magna cum laude from Harvard Law in 1948, Charlie moved into the business world.

Psychology of Human Misjudgment

This blog is narrowly focused on what I gleaned from Charlie’s writings about the “psychology of human misjudgment.” Looking to see how this information could be used to help guide a EVM training workshop on the topic of decision making, I went through each of the 25 “tendencies” that he defined and discussed. I would never have guessed that we humans have 25 tendencies that impinge on our thinking processes, but after studying his list, I think he nailed it. Most of the tendencies are backed up with some reference to psychological studies; so be assured Charlie did not make them up. This blog will treat them in numerical order and will add thoughts from the Humphreys & Associates earned value training material on decision making that will make the Charlie Munger points more specific to the subject at hand.

In our EVM training material, we emphasize the process of decision making is critical, and Charlie thought so way before I did. Bad decisions can come from good processes, but that is less likely than bad decisions coming from no process or, even worse, from a bad process. At one point Munger advises the use of checklists can help navigate through the minefield of human tendencies toward misjudgment. An amazingly timely idea, because here at Humphreys & Associates we are just wrapping up our work on “The Big Book of Project Management Checklists” that is aimed at doing just that.

Blocking Human Misjudgement

What about human misjudgment? It appears we humans are fraught with innate tendencies that, if not blocked, can lead us to make misjudgments. A misjudgment would be a wrong decision in terms of this blog. With all that follows in the blog about misjudgment, we are trying to discern a sound process for earned value decision making, with tools like decision trees, that can help avoid or counter the influences of the counterproductive tendencies. Developing your decision-making process should involve findings tactics that help you avoid or defeat or neutralize these tendencies in your EVMS processes.

Tendency #1 – Reward and Punishment Super-Response

Let’s cover one tendency as an example. Tendency #1 is called the “Reward and Punishment Super-Response Tendency.” The word “super” attached to the idea of response to reward is to emphasize that this is a case of over responding. We all know people move toward what is incentivized; they seek the reward. It must be obvious that, if the wrong thing is incentivized, people will be moving in the wrong direction. According to Munger, there is a strong tendency to move toward the reward; an overly strong tendency. Charlie cites some great examples from his experience. Your decision-making process should include some “clearing the minefield” efforts early on in the process to make sure that the decision will not be made in a move toward a reward that would be wrong for the situation. A simple example could be that you are involved in deciding about launch-ing a long-term effort that would cost quite a bit that does not have certainty to the outcome. If you are incentivized toward short terms profits, then you have the biased tendency to discard the idea in favor of short term gains.

Deprival Super-Reaction Tendency

There is a potentially related tendency called the “Deprival Super-Reaction Tendency.” This is the tendency to feel more pain from a loss than to feel pleasure from a gain of the same amount or thing. According to this tendency, there is more motivation associated with avoiding pain than making a gain. The see-saw is weighted in one direction. How counterproductive is that tendency toward carefully considered decision-making? If we are trying to make a gain in our decision process, we are not only fighting the facts of the situation but also our innate bias against taking a risk. The idea can be seen in the commonly observed action of throwing good money after bad. A loss is imminent, so the decision is to spend more to head it off to potentially save the day and avoid the pain; is that wise? Think about the situation where someone says or is known to think that “I will not be denied no matter the cost.” You probably do not want that kind of thinking involved in your decision making. Now think about a situation where tendency #1 and tendency #2 both align against one of the options being considered. Would an option that faces the tendency to risk some pain of loss and to move against a potential reward stand a chance if those tendencies were not neutralized?

Blog Series

Hopefully you get the idea now. This blog will be followed by another that covers some of the remaining tendencies identified by Charles T. Munger. I hope to learn more from and will translate what I learn here and in our EVM training material. Stay tuned.

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Preventing a Communications Failure

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US Army Helicopter

“What we’ve got here is failure to communicate.”

From the movie “Cool Hand Luke”, you would probably remember the famous line, “What we’ve got here is failure to communicate. Some men you just can’t reach. So you get what we had here last week….”

Ask people who work on programs and projects, “From your experience, what are the top 10 reasons that projects fail?”  You will nearly always find, at the top of the list, the cause as being one of poor communications. That’s right, failure to communicate, pure and simple. But maybe not so pure and not so simple.

Establish a Communications Plan

There are so many dimensions to communication that it is advisable, even necessary, to establish a communications plan. Think about all the topics we need to communicate; the list is mighty: goals, schedules, budgets, product requirements, status, problems, successes, forecasts, roadblocks, directions, and so on. So, it makes sense that we should take time to define the communications process and actions in our communications plan.

Assuming we are about to undertake a new project rather than inject ourselves into an ongoing one, we should consider the most natural first step in preventing a communications failure. Just as we must define the product requirements, we should also define the requirements for communications through an analysis. That analysis should be rigorous and should cover all apparent aspects of communications.

  • What do we need to communicate?
  • Who are the providers and the receivers of various communications?
  • What are the form and format for the communication?
  • What are the frequencies required for these communications?

Such a requirements analysis could result in a communications compliance matrix that lists the requirement and provides the method by which the requirement will be satisfied.

Formal and Informal Communication

Two major subsets of communications could be the formal and the informal. To start considering the formal we could go to the contract the Contract Data Requirements List (CDRL) and the many requirements for plans, reports, and other deliverables that are forms of communications. The contract could be the root of a large tree that grows level-by-level. For example, the contract might have the Statement-of-Work (S0W) that tells us to use the systems engineering approach and a CDRL item to provide a System Engineering Management Plan (SEMP) in which another level of communication is revealed. On major contracts the SEMP is but one of several plans that are often required and should be extremely useful in defining the communications plan. The totality of these plans is comprehensive and very detailed.

EVMS Structure

Of interest to us here in this blog is the requirement to manage the program using Earned Value Management Systems (EVMS). A properly implemented EVMS can be the key to avoiding many of the problems of communications that are rolled up into the generic problem of “poor communications.” EVMS is one for the formal requirements that can embody wide ranging forms of communications. In the EVMS we will communicate:

  • Goals for scope, schedule, and budget. These are in various artifacts within the EVMS and provided to the stakeholders. Goals are the topic of the Integrated Baseline Review (IBR) to the extent that the probability of meeting the goals is assessed. Goals are clear when you have an Earned Value Management System.
  • Structure for the project work, people, and resources. EVMS requires a Work Breakdown Structure (WBS) to formally define and decompose the work. That means it is open and clear to all on the project what must be done top to bottom and by whom it will be done.

Integrated Master Schedule

Timing for work is established in the comprehensive Integrated Master Schedule (IMS). The IMS, when properly built and coded, provides deep insight into the time plans for the project and the relationships among the players. Topics such as “external dependencies” might have once been an obscure bit of knowledge but in the IMS these are clearly defined, and the logic shows what is dependent on these external inputs to the project.

The IMS communicates the milestones that are to be achieved. Vertical integration from the work tasks to the milestones provides the links that communicate the contributors to any major event. We know what and when we must reach a certain capability, and, with the IMS, we know how we will get there and who will carry us to that goal.

Work Authorization Document

The control account Work Authorization Document (WAD) provides a formal documentation of the baseline agreement on scope, schedule, and budget for the managerial subsets of the total project work. Carving out these manageable sections of work and making formal communication of the goals and responsibilities provides a detailed communication and acceptance for the project goals and the responsibility for their accomplishment. It would be nearly impossible to get lost in the well documented baseline of an EVMS managed project.

Measuring Progress

The status of our project is known by measuring our progress and reporting it formally; these are cornerstones of the EVMS.

  • What should we be doing?
  • What are we doing?
  • Are we meeting our scope, schedule, and spending goals?
  • Where are the problems?
  • What are the root causes of the problems? The impacts?

Communicating all of these up and down the hierarchies and even to the customer provides what should be open and clear communication. The generic complaint of “poor communication” often means “I was surprised.” There should be no surprises in a well run EVMS program.

Future Outcomes

Perhaps the most important thing to communicate is the future outcome. Based on our plans and our status, we are always making projections for the potential outcomes of our project from within our EVMS. The forecast for timing is contained within the IMS. The forecast for spending is contained within the Estimate to Complete (ETC). Each period we update out view of the future and analyze what that means. We use the analysis to undertake corrective action plans that have the intended effect of getting us back on track.

Summary

So, in summary, you should see that poor communications of the items that are within the purview of the program management system (EVMS) should not happen. The EVMS should be one the main pillars of communications plans and processes to prevent a communications failure. The outcome of the program might still be less than desired, but the outcome should have been foreseen and discussed many times within the communications engendered by the EVM System. We should know what we need to do, how we are doing, and where we will end up; and those are all things we need to communicate.

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Summary Level Planning Packages (SLPPs) Misnomer and Alias

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Summary Level Planning Packages (SLPPs) Misnomer and Alias

Origins

One of the confusing terms in the world of Earned Value terminology is “Summary Level Planning Packages” or SLPPs. The term first appeared in Section 1 of the Earned Value Management Implementation Guide (EVMIG), published in 1996 which read:

Summary Level Planning Packages (SLPP) – “When it is clearly impractical to plan authorized work in control accounts, budget and work should be identified to higher WBS or organizational levels for subdivision into CAs at the earliest opportunity.” At this time, EIA-748 was still in draft form.

When 748-1998  was released, the SLPP reference was included with a slight modification to its use being limited to; “work scope for business reasons, is not yet allocated to responsible control accounts”.

With that being said, the term was never specifically included in the EVMS Guidelines (neither the original 35 criteria nor the initial 32 EIA Standard Guidelines)!  The concept itself was again put forth in 748-B where the title changed to “Higher Level Account”, but the SLPP was still not referenced.  With 748-C, the same phrasing is found.  Throughout this time, Guideline 8 has not changed, where it continues to say (underlines added):

“Budget for far-term efforts may be held in higher-level accounts until an appropriate time for allocation at the Control Account level.”

Higher Level Accounts

The term was “Higher Level Accounts” (HLA if you prefer an acronym), and that is the only mention in any of the Guidelines themselves.  In their 25 June 2015 Cross Reference Checklist, however, the DCMA felt the need to clarify the term in several spots:

8.a.(2) Higher level WBS element budgets (where budgets are not yet broken down into control account budgets) also known as a Summary Level Planning Package?

  1. b. Does the Contractor’s system description or procedures require that the sum of control accounts, Summary Level Planning Package (SLPP) budgets, Undistributed Budget(UB), and Management Reserve(MR) reconcile and trace to the CBB or Negotiated Contract Cost (NCC) plus the estimated cost of AUW) for any recognized OTB?
  2. b. Are ETCs developed at the work package, planning package, and Summary Level Planning Package (SLPP) levels, or where resources are identified if lower than the work package level?
  3. j. Are VACs calculated and analyzed with corrective actions at the control account (at a minimum) and Summary Level Planning Package (SLPP) levels?

Created to Help

The term “Higher Level Accounts (HLA)” was created to help contractors comply with the government requirement to distribute budgets from Undistributed Budget (UB) within two full accounting periods after definitization of the contract value.  Many contractors on large, long term contracts were struggling with distributing work and budget for far-term effort about which they were not yet sure where or by whom the work would be performed.

The government allowance to create Higher Level Accounts enabled the contractors to “distribute” the scope and budget to an account – as though it were a Control Account – where someone would “tend it” until the contractor could better define where and by whom the work would be performed.  While in the HLA status, the assigned higher-level manager (the PM or a functional manager designee) would be responsible to ensure the time phasing of the high-level budget was current and that the EAC for the work in the HLA was up to date (rates and time phasing ).  Once the contractor determined the appropriate Control Account Manager responsible for getting the work performed, the scope, schedule, and budget in the HLA would be transferred (distributed) from the Higher Level Account to the Control Account.

Misnomer

As stated earlier, the origin of the term “Summary Level Planning Package – SLPP” is not really known, and it is really a misnomer:

  1. It is not a Summary Level (i.e., other Control Accounts do not summarize into it).
  2. It is really not a Planning Package (the responsible Higher Level Manager does not perform any planning for the work in the HLA – it is just a holding point until it can be distributed to, and planned by, the ultimate CAM).

This last point is where some people become confused.  Being called a “Planning Package,” some people think the SLPP is part of a Control Account that is at a higher level within the Control Account than a Planning Package.   That is another distinction between an SLPP (HLA) and a Planning Package – an SLPP can NEVER be directly detail planned into Work Packages.  The budget in an SLPP must be transferred to a Control Account for that CAM to detail plan the work as necessary over the period of performance of the Control Account.

To be fair to the CAM receiving the HLA/ SLPP scope, schedule, and budget, the project should also have a “Rolling Wave Planning” approach for the HLA/SLPP, one that is at least 30 days in advance of the normal CAM Rolling Wave Planning process.  This would give the CAM time to incorporate the work and budget time phasing into the Control Account (generally in one or more Planning Packages within the Control Account) in order to then be prepared for any necessary detail planning into Work Packages as part of the normal Rolling Wave Planning process.

Final Thought

Some people do not even consider Higher Level Account to be an appropriate description since the HLA/ SLPP is essentially at the same level as the Control Account.  The “Higher Level” aspect means it is assigned to a higher level manager than a Control Account Manager (CAM) for that manager to “tend to” the scope, schedule, and budget until it is distributed to a CAM.

So even though HLA is what it is, SLPP is what it has become.

Higher Level Accounts or Summary Level Planning Packages can be confusing and often an area where projects need some help.   A Humphreys & Associates EVM Consultant can provide the guidance you need for your unique production or development project.  Please contact us for more information.

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EVM Consulting – Modeling & Simulation

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Fighter Jet Air Plain Flying in Front of Moon

Forewarned is Forearmed

Forewarned is forearmed. John Farmer, of New Hampshire, said that in a letter in 1685. But that advice is most likely biblical and very much older. No matter the source of the thought, we should take it as divine guidance if we are project managers. Maybe we should have it cut into a stone tablet, so we can share it with our team members.

Most of our work as project managers is spent in the “controlling” phase which is made up of the three steps “measure, analyze, act.” Our EVMS and IMS exist to be able to support this management function. The measuring part is done very well in our EVMS and our IMS; we know where we are and how we got there. The analyzing is equally well handled in the IMS and EVMS. Only the management task of acting is not well supported. Generally, we lack decision making support and tools.

EVM Consulting - Measure, Analyze, Act

Deterministic Path

No matter how well constructed and how healthy our IMS is, it has a deterministic path forward. The logic links between the activities are there because we expect them to be fulfilled. Indeed, if activity “B” is a finish-to-start successor to activity “A” we fully expect that at some point activity “A” will finish and will provide its output to activity “B”. That is a single path forward and it is a deterministic path. It is also a somewhat simplistic model.

EVM Consulting - Deterministic Relationships in EVMS

Multiple Outcomes

Our management system asks us to perform root cause analysis followed by corrective action. But what if there is more than one corrective action to be taken. And worse; what if the corrective actions can have multiple outcomes with each enjoying its own probability. That means multiple choices and multiple outcomes. How would we show that in our plan? How would we analyze the multiple possible futures that such a situation presents?

Happily, there are ways to model a future without a set path. And once we have the future model, there are also ways to simulate the outcomes to give the probabilities we need to decide which actions to take. We are talking about probabilistic branching, and we are saying that we can build a probabilistic map of the future to use in making decisions; especially making decisions on corrective actions.

Take a simple example of running a test on the project. The expectation is that eventually we will pass the test. We will keep trying until we do. In the IMS deterministic model the test portion of the IMS might look like this:

EVM Consulting - Run the Test then Use the Product

Simulation

We can simulate this situation with different expected durations for the test. That is helpful information, but it does not explain or even capture what is going on in those different durations. It looks like we are just taking longer to do the testing but is that really what is happening? What is going on here? We certainly don’t show that.

In the real world, this simple model might have three potential outcomes. There might be three paths we can take to get to the point where we use the product. Each path has a time and money cost. We might run the test and find that we passed. Or we might have to stop the test for issues on the item or the test setup. We might even fail the test and must correct something about the product to improve our chances of passing a rerun. Eventually we will get to a usable product. But what do we put in our estimate and our plan? What do we tell the resources we need? What do we tell the boss? The customer?

EVM Consulting - Real World Testing

Full Future Model

We now have a much better understanding of the future and can explain the situation. We also can simulate the situation to find out the most likely time and cost outcomes, so we can explain the future without any histrionics or arm waving.
If the issue is important enough we can build out the full future model and simulate it.

EVM Consulting - Full Future Model and Simulation

No matter how far we pursue the model of the future, having a valid model and being able to stand on solid ground are very valuable to us as project managers.

This is not to say that we should model out complex situations as a routine in the IMS. That would be impossible, or at least prohibitively costly. We are saying that when situations arise, we need to be able to use the IMS to help us make decisions.

This type of probabilistic modeling of the future is particularly useful in defining major decision points in our plan. When we reach a decision point the IMS may have multiple branches as successors but that implies we take every branch and that is not valid. Modeling each branch and its probabilities is valid. In the example below, where the milestone represents a decision point, we have shown three possible paths to take. If each were modeled out into the future with time and cost data, we should have the information we need to choose the path we wish to pursue. Without processes and tools like this, we would be flying blind.

Future Blog Posts

This discussion will be continued in future blogs to develop a better foundational understanding of the process and power of probabilistic modeling in our EVMS.

EVM Consulting - Decision Point

Good information sets the stage for good decisions. The IMS and the EVMS have sufficient information to help us model the pathways ahead of our critical decisions. We just need to learn to take advantage of what we have available to us.

Find out how an experienced Humphreys & Associates EVM Consultant can help you create a full future model and simulation of your most vital EVMS Systems. Contact Humphreys & Associates at (714) 685-1730 or email us.

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