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The Risk of Ignoring the Lesser Risk in Projects - Ideas for Leaders
Idea #843

The Risk of Ignoring the Lesser Risk in Projects

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Image by Mohamed Hassan from Pixabay
Image by Mohamed Hassan from Pixabay

KEY CONCEPT

Most business projects or activities involve “conjunctive risk”: they are successful only if multiple components are successfully executed. Decision makers often place too much emphasis on the riskier components of the project and neglect the less risky components—which could ultimately cause the failure of the project.


IDEA SUMMARY

Business projects, opportunities, or endeavours typically involve conjunctive risk—that is, the endeavour will succeed only if multiple, uncertain events occur. If just one of these required events fail to occur, the endeavour fails. For example, the success of a new product might depend on new technology and successful marketing. A technologically amazing product for which there is no viable marketing demand will ultimately fail. Conversely, the greatest marketing for a poorly made or functioning product will also ultimately fail.  

To successfully manage conjunctive risk, decision makers must choose how to allocate their time, effort, or money—between, for example, technology development and marketing initiatives in the case of the new product described above.

According to a team of NYU and Dartmouth researchers, decision makers managing conjunctive risk often misallocate their resources. The core problem, according to their research, is how these decision makers respond psychologically to the likelihood of the multiple required events occurring.

The researchers created a series of conjunctive risk experiments in which the conjunctive risk involved one required event that was less likely to occur, which they called the weaker-link, and one required event more likely to occur, called the stronger-link. Without fail, the participants in the experiments engaged in a “worst-first” strategy, choosing to invest their time and effort in improving the chances of the weaker-links, while ignoring the stronger-links.

In the first experiment, for example, participants were given eight opportunities to win money if, in each case, two requirements were met—a stronger-link requirement that had 40% chance of success and a weaker-link requirement that had 20% chance of success. The overall chance of the participants winning the money was thus 8% (40% x 20%). In four of the opportunities, participants had the option of improving the stronger-link chance of success by 10% (from 40% to 50%). To do so required some effort: typing “ab” 45 times. They could not touch the weaker-link. In the other four chances, had the option of improving the weaker-link chance of success by 5% (from 20% to 25%), while the stronger-link remained the same.

Because the proportion of the improvement percentage was identical (i.e., 5% of 20% is the same as 10% of 40%), the participants’ overall chances of winning the money increased the same whether they improved the weaker-links or stronger-links. Nevertheless, participants were more likely to expend the effort to improve the weaker-links chances of success while passing on improving the stronger-links chances.

In a second experiment, the figures were manipulated so that improving the chances of the stronger-link occurring had a greater impact than focusing on the weaker-link. A third experiment made the math explicit—that is, participants were given the calculations demonstrating that improving weaker-links was not necessarily advantageous. Yet another experiment involved reducing the chances of success because of theoretical budget cuts. In another experiment, the weaker- and stronger-links were described non-numerically (as two teams working on a hypothetical project, one of which was less likely to succeed, while the other more likely to succeed).

No matter how the conjunctive risk was presented or how the details might be changed, the majority of participants in all these experiments chose time and again to focus on the weaker-links and ignore the stronger-links. Psychology explains the results of these experiments, according to the researchers. When managing conjunctive risk, decision makers intuitively perceive the weaker-link as negative and the stronger-link as more positive. Because of what psychologists call the negativity bias, which over-emphasizes the impact of negative events, decision-makers intuitively consider these “negative” weaker-links as the more severe barrier to the success of their endeavour, and thus in need of investment—even if, in fact, improving the likelihood of a stronger-link occurring can have more impact on the overall chances of success for the project.


BUSINESS APPLICATION

Conjunctive risk exists in most business projects and endeavours. It is likely that success depends on the successful execution of multiple, independent components. This research indicates that decision makers may be too quick to focus their efforts and investment on improving the riskier components and undervalue the opportunities and benefits of improving the less-severe risks. It’s possible that they will thus work hard to overcome one hurdle, only to then run into another hurdle that could possibly have been avoided.

 

This research also reveals the potential inconsistent expectations between top decision makers who decide which projects to start and project managers charged with implementing the projects. Firm leaders may discover that unexpectedly, project managers are overinvesting in weaker-links and neglecting other critical elements of the project.

 

Leaders will want to ensure that slower, rational thinking rather than faster, intuitive thinking is guiding conjunctive risk decisions in their organizations.


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FURTHER READING

Joshua Lewis’ profile at NYU Stern School of Business

https://www.stern.nyu.edu/faculty/bio/joshua-lewis

 

Daniel Feiler’s profile at MIT Sloan School of Management

https://www.tuck.dartmouth.edu/faculty/faculty-directory/daniel-c-feiler

 

Ron Adner’s profile at Dartmouth Tuck School of Business

https://faculty.tuck.dartmouth.edu/ron-adner/



REFERENCES

The Worst-First Heuristic: How Decision Makers Manage Conjunctive Risk. Joshua Lewis, Daniel Feiler, Ron Adner. Management Science (June 2016). https://pubsonline.informs.org/doi/10.1287/mnsc.2022.4411

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Idea conceived

March 14, 2022

Idea posted

Feb 2023
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