Risk Attitudes

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Program managers must lead in an environment of uncertainty. Risk management processes provide structure to handle this uncertainty. The uncertainty by itself is challenging enough, but if it is not handled with consistent methods, it escalates. Therefore, the program manager needs to create a proactive and positive culture when it comes to risk management.

This 6 part Guide to Program Risk Management will help you identify risks and walk you through the process to assess impact and involve stakeholders.

Part 1 of 6: The Program Manager’s Risk Environment
Part 2 of 6: Risk Statements
Part 3 of 6: Likelihood Scales
Part 4 of 6: Establishing Adequate Reserve
Part 5 of 6: Risk Attitudes
Part 6 of 6: Be Success Oriented

Part 5 of 6: Risk Attitudes

Program managers need to establish a consistent method for evaluating and responding to risk across the enterprise. One obstacle to consistency in managing risk is that people naturally have different attitudes toward risks, and those attitudes vary with the circumstance. The three primary characteristics that describe risk attitudes are risk-seeking, risk-neutral, and risk averse. You exhibit a risk-seeking attitude when you are willing to pay a premium or penalty to accept a risk, a risk-neutral one when your decisions are based solely on expected monetary value, and a risk-averse one when you are willing to pay a premium or penalty to avoid risk.

The average person is usually risk-averse. The program manager has to recognize that successful organizations often perform best when they are aggressive and risk-seeking even though project managers may naturally be risk-averse.

This is further complicated by the fact that a person’s risk attitude is usually a function of wealth. Although there are never absolutes in dealing with human behavior and attitudes, in general people are more risk-seeking in a poor state and more risk-averse in a wealthy state.

Why is this important to a program manager who is trying to manage risk consistently? It is important because a project manager’s risk attitude can be a function of his or her perceived state of wealth of the project. That is, the project manager of a wealthy project that is on schedule with an adequate budget and no issues may be reluctant to make aggressive or risky decisions because of an underlying risk-averse attitude. Conversely, a project manager of a project that is behind schedule and over budget may be overly aggressive because of an underlying risk-seeking attitude that results from a perceived low-wealth state.

It is important to realize that neither of these decisions is wrong. The point is that in general, project managers on stable projects may miss or purposefully forgo opportunities because they are not sufficiently risk-seeking. Similarly, project managers on projects in desperate circumstances may employ too many desperate risk-seeking measures (e.g., reducing testing requirements) as a result of their underlying risk attitude. The program manager must be aware of the strong influences of risk attitudes on decisions and take them into account.

In dealing with projects that are very stable and are performing well, you need to ask the project manager: “If we had to deliver this project 25 percent sooner (or 25 percent cheaper), what would be the top three recommendations you would make to achieve this?” This forces the wealthy state risk-averse project manager to think like a risk-seeking project manager and facilitate the risk/reward trade-off analysis. When you are addressing project managers of projects that are behind schedule and/or over budget, the question should be: “If none of the schedule and/or cost pressure were in this project right now, what are the conservative decisions we would take to ensure a quality deliverable?” This forces the poor state of wealth risk-seeking project manager to think like a risk-averse project manager and ensures that the current plans of action will be put into the proper context. Remember, you want the best decision for the circumstances regardless of the underlying risk attitude.

Once your team has decided on their plan and process, PPM software can help you execute that process. WorkOtter helps you successfully execute your program process strategy for project success. Get a demo of WorkOtter and see how we can make your program management effective.

“The Handbook of Program Management: How to Facilitate Project Success with Optimal Program Management, Second Edition” by James T. Brown is a copyrighted work of McGraw-Hill and McGraw-Hill reserves all rights in and to the Content. ©2014 by McGraw-Hill Education. Purchase the book on Amazon.

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