Behavioral economics: The IT failure domino effect

Summary:Most managers believe their organization's investment and project execution decisions are rational and based on informed choice. However, bias creates a domino effect that culminates in failed projects.

Most managers believe their organization's investment and project execution decisions are rational and based on informed choice. In reality, bias frequently leads to poor decision-making, creating a domino effect that culminates in failed projects.

CIO Dashboard blogger Chris Curran, Chief Technology Officer of Diamond Management & Technology Consultants, uses behavioral economics to help explain IT failure:

[P]rojects with the poorest outcomes came out that way not by surprise, but after a series of interim decision points during which leadership reviewed the major project issues and alternative courses of action, and selected one course they thought would best right the ship.

Harvard Magazine begins a discussion of behavioral economics by exploding the myth of purely rational decision-making:

Economic Man makes logical, rational, self-interested decisions that weigh costs against benefits and maximize value and profit to himself. Economic Man is an intelligent, analytic, selfish creature who has perfect self-regulation in pursuit of his future goals and is unswayed by bodily states and feelings. And Economic Man is a marvelously convenient pawn for building academic theories. But Economic Man has one fatal flaw: he does not exist.

Chris created this chart to link behavioral economics and IT decision-making:

Behavioral Economic Category Sample Consumer Behavior Project Decisions Analogy
Decision Shortcuts Use the cost of something else similar for comparison instead of knowing the actual value of something

Over reliance on a “default” option as the best option

Use rules of thumb rather than understand actual need

Often, we create 3 options to consider when addressing a project issue. These options should be developed with equal effort and with every intention of making them all viable. Many times, we presuppose the “best” or most likely option, make the second one similar but less desirable and the third, very different and hard to compare to the others.
Irrational Value Assessment “Free” products cause purchasers to overlook underlying math

Higher priced items are often seen as better value or quality

Customers act differently based on how options are presented

Don’t overvalue “free” services offered by a vendor or integrator to “fix” a problem. Make sure that all alternatives are presented using the same framework to compare the costs, benefits, risks, ability to address the issue at hand, etc.
Emotional and Social Impacts Valuation of future purchases are made on the basis of past purchases and behaviors

Different decisions are made when in a “hot” emotional state than when in a “cold state

Buyers place a higher sensitivity to cash than other representations of value

People do or believe things because others do the same – get on the bandwagon

Don’t put too much weight on what other companies / competitors are doing. Instead, focus on your needs and expectations.

When a major project issue is uncovered – large schedule slip, failure of a technology component – introduce a “cooling down period” before any major decisions are made.

THE PROJECT FAILURES ANALYSIS

Virtually every major software vendor, enterprise customer, and system integrator has invested substantial resources to create processes for managing projects successfully. Despite millions spent to solve this problem, failures persist and enterprise IT sometimes seems a black hole of waste.

Some observers, such as Roger Sessions, discuss the problem in terms of complexity. Others, such as Samuel Prasad, talk about "human risk factors."

In fact, human-centric bias is the common thread among all these approaches. Bias is particularly an issue on cross-boundary initiatives, where multiple groups of stakeholders work together on a project. Each stakeholder group has particular goals and is judged against metrics that may be unique to that group. Bias tends to be a substantial driver of project disruption in organizations where goals or metrics across groups are in conflict.

My take. Behavioral economics can help explain the detailed process through which experienced people make decisions that ultimately lead to failure.

You can reduce the impact of bias by managing how stakeholders collaborate and by deploying systematic early-warning measurement techniques.

Photo from iStockphoto. Disclosure: Diamond is an Asuret strategic partner.

Topics: CXO

About

Michael Krigsman is recognized internationally as an analyst, strategy advisor, enterprise advocate, and blogger. For CIOs and IT leadership, he addresses issues such as innovation, business transformation, project-related business objectives and strategy, and vendor planning. For enterprise software vendors and venture-funded star... Full Bio

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