The document outlines five rules for risk management: 1) There are no objective estimates of the future due to cognitive biases like anchoring and availability. Facts are in the past while estimates rely on perception. 2) Requirements are never fully complete since it's impossible to imagine everything. 3) Central tendency smoothing washes out asymmetrical extremes, with pessimism and optimism balancing out. 4) Confidence in schedules degrades exponentially after work streams merge due to merge bias. 5) Probabilistic risk analysis models like FMEA are needed for systems with many interdependent parts, to understand behavior and failures.

1. Five rules for risk management
A presentation
Produced by
Square Peg Consulting, LLC
Orlando, Florida
www.sqpegconsulting.com
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2. What does PMBOK say about risk management?
• Risk: Events or conditions with uncertain potential to
impact project objectives
• Risk management: Actions to minimize unfavorable
impacts or maximize favorable possibilities
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3. More than Chapter 11; More than the risk register
• I want to forecast a risk (Chapter 11)
• I want to take a risk (Decision policy and risk-adjusted
process)
• I want to be confident (Risk adjusted estimating paradigms)
• I want to test my hypothesis (Risk adjusted reasoning
paradigms)
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4. Where’s the risk?
• In the baseline: work estimates, project architecture,
product architecture
• Off the baseline: risk register possibilities
• In the ether: stakeholders, regulators, users, customers
• Friends and neighbors: portfolio and program
dependencies
• Among opportunities: Do this, or perhaps that ….
• After it’s over: post-project adoption & support
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5. 5 Rules: Begin with the end in mind
1. There are no facts about the future: Facts are in the past;
estimates, biases, and perception are the future
2. Requirements (and tests) are never complete: No one can
imagine everything
3. Central tendency rules the metrics: Optimism and
pessimism find a balance
4. Merge bias dominates schedule risk: Confidence takes a hit
when paths, work streams, or projects join
5. If it’s mission critical, it often takes a model: PRA isn’t for
everything
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6. (Rule 1) There’s no objective estimate
• Adjustment and Anchor bias:
– Initial value sets anchor (Boss to Dilbert: I think it oughta cost …. )
– Anchor limits adjustment
• Representative bias:
– A is part of B, B caused by A, A will cause B
– Because there’s progress now, there will be progress when …..
• Availability:
– Imaginable, retrievable comparisons, easily recalled
– This is just like ……
Amos Tversky and Daniel Kahneman: “Judgments under Uncertainty”
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7. (Rule 1) Utility maps perceived reality
• Utility maps reality to
Hubris: This
solves
perception everything!
• Hubris inflates estimated
advantage and mitigating
effects Utility value
• Dread inflates expected
impacts Objective
value
Dread: This is going to kill us!
“Against the Gods” by Peter Bernstein
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8. (Rule 1) Facts v. Future—Project balance sheet
• Sponsors are more optimistic (under estimate resources)
• Project managers are more pessimistic (over estimate risks)
Value Risk gap
Proposition
for the
Project Scope
Time
Resources
Quality
Management’s investment Project’s use of
investment
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9. (Rule 2) Requirements are never complete
• Sampling errors in the V model
Vision
Strategy → goals Verify deliverables
Sampled elicitation, Validate
and elaboration design/development
Iterate
Requirements
Correct
Specification (Backlog)
(refactor) errors
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10. (Rule 3) Central tendency is smoothing
• Asymmetrical extremes wash out
• Pessimism and optimism balance
Work package
manager
Project
manager
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Image: http://herdingcats.typepad.com/my_weblog/2011/05/deterministic-versus-probabilistic.html
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11. (Rule 3) Antithesis to Central Tendency
• Black swan: made famous by Nassim Taleb
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12. (Rule 3) Extreme impact events
• 3 rules of Black swans
1. An outlier, beyond realm of reasonable expectation, with
nothing in the past to convincingly point to its possibility
2. Carries an extreme impact
3. After the fact, it’s “explainable” and “predictable”
• 1% doctrine*
– If the impact is extreme, no matter it’s probability, consider
the event a certainty
* Ron Suskind: “The One Percent Doctrine”
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13. (Rule 4) Merge bias dominates schedule risk
• Confidence degrades exponentially (geometrically) at
joining paths
Confidence: 80% ≤ 4
Before merge
After merge
Confidence: 64% ≤ 4
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14. (Rule 4) Buffer to mitigate merge bias
• Akin to Critical Chain method *
Plan slack (buffer) in one path
Eliyahu Goldratt: “Critical Chain”
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15. Rule 5: It often takes a model
• Probabilistic risk analysis (PRA) of large number of
conjunctive constituents may be meaningless (everything
has to work = success)
• Model behavior, failures, and safety
– Confirming (prediction & control)*
– Exploratory (insight & understanding)*
*Steve Phelan, The Interaction of complexity and management
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16. Rule 5: Three common models
1. FMEA: Failure Mode and Effects Analysis**
– MilStd 1629, NASA, Others
2. FTA: Fault tree analysis
– Bell Telephone, Boeing, others
3. Event trees; Event Logic Diagrams
** Also: FMECA, Failure Mode Effects and Criticality Analysis
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17. Rule 5: FMEA is inductive
Inductive: Observations Cause
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18. Rule 5: FMEA Example
• How would you control the loss of a nail ?
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19. The author of this seminar
John C Goodpasture, PMP
Program manager, author, coach,
and instructor
• PMI eSeminarsWorldsm instructor for
Advanced Risk Management, and Agile
Project Management
• Project coach in Europe, Asia, and the
United States
Portfolio manager and business unit
leader
• Operations and IT professional
• System engineer in the Department of
Defense and the aerospace industry
info@sqpegconsulting.com
johngoodpasture.com
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20. Read more …..
• “PMBOK Risk Management Practice Standard”
• “Black Swan” by Nassim Taleb
• “Against the Gods” by Peter Bernstein
• “Judgments under Uncertainty” by Amos Tversky and Daniel Kahneman
• Probability and statistics online: Khan Academy videos (khanacademy.org)
• Schedule risk analysis by David Hulett (projectrisk.com)
• FMEA NASA Practice Standard, DoD MilStd 1629
• Project balance sheet (http://www.slideshare.net/jgoodpas/the-project-balance-sheet)
• “The Flaw of Averages” by Sam Savage
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21. All done and ready for questions!
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