Project Selection Under Uncertainty

Fundamentals of Managerial Economics, 1979

2017

This report introduces concepts, principles, and approaches for addressing uncertainty in decision making. The sources of uncertainty in decision making are discussed, emphasizing the distinction between uncertainty and risk, and the characterization of uncertainty and risk. The report provides a brief overview of decision theory and presents a practical method for modeling decisions under uncertainty and selecting decision alternatives that optimize the decision maker's objectives. The decision modeling methods introduced in this paper are suitable for both data-rich and data-poor decision environments. This report describes how to analyze the sensitivity of a decision model to improve understanding of the decision problem and build confidence in the conclusions of an analysis. Principles of adaptive management and adaptive engineering are discussed from a decision analysis perspective. Examples are provided to demonstrate how these methods could be applied within the U.S. Army Corps of Engineers. DISCLAIMER: The contents of this report are not to be used for advertising, publication, or promotional purposes. Citation of trade names does not constitute an official endorsement or approval of the use of such commercial products. All product names and trademarks cited are the property of their respective owners. The findings of this report are not to be construed as an official Department of the Army position unless so designated by other authorized documents. DESTROY THIS REPORT WHEN NO LONGER NEEDED. DO NOT RETURN IT TO THE ORIGINATOR.

Project Appraisal, 1994

The way in which projects should be managed is influenced by the degree to which the outcomes, or goals, are clear and by the state of knowledge about how these outcomes might be achieved. Thk is particularly so in research and development, where a simple framework for mapping uncertainty has proved to be a valuable aid to project managers.

The aim of this paper is to discuss the phenomenon of uncertainty in projects and attempt to integrate it as part of project management. Despite the fact that project management discipline has gained a lot of attention in the past decade from both academia and practitioners, there is still considerable potential for development in this field. Recent trends in project management stress the need to re-address the issue of uncertainty. Though one can come across the notion of uncertainty in traditional project risk management literature rather often, there is no common understanding between the scholars as to what this term means. Based on the review of the existing research, I present my own definition of uncertainty as a crucial element in managing projects. The management of uncertainty is seen as a necessary condition for effective project management. Sources of uncertainty are wide ranging and have a fundamental effect on projects and project management. These sources are not confined to potential events, and include lack of information, ambiguity, characteristics of project parties, trade offs between trust and control mechanisms, and varying agendas in different stages of the project life cycle. There is a high level of uncertainty with both positive and negative effects in any project. The traditional approach to project management still puts a lot of emphasis on assuring conformance to time, budget and scope constraints. Considerations, such as continuous improvement, customer-centric thinking, reflective learning are often left behind. This leads to the fact that project companies become less flexible, unable to accumulate knowledge and experience necessary for coping with uncertainty. Moreover, in project risk management literature, there is no common understanding as to what uncertainty is. DEFINITIONs: Project: A project is a unique, transient endeavour, undertaken to achieve planned objectives, which could be defined in terms of outputs, outcomes or benefits. A project is usually deemed to be a success if it achieves the objectives according to their acceptance criteria, within an agreed timescale and budget. A project is a temporary endeavour designed to produce a unique product, service or result with a defined beginning and end (usually time-constrained, and often constrained by funding or deliverables) undertaken to meet unique goals and objectives, typically to bring about beneficial change or added value. [Wikipedia] A project is a series of complex, connected activities with a common purpose; our most common context is a project to develop or refine a program, but principles of project management apply to most projects. Often program and project are used interchangeably, but nominally, a program is a larger concept than a project. (A project is a sequence of unique, complex, and connected activities having one goal or purpose and that must be completed by a specific time, within budget, and according to specification). [UC davis, 2013] Management in businesses and organizations is the function that coordinates the efforts of people to accomplish goals and objectives using available resources efficiently and effectively. Management includes planning, organizing, staffing, leading or directing, and controlling an organization to accomplish the goal. [Wikipedia] Management is often included as a factor of production along with‚ machines, materials, and money. According to the management guru Peter Drucker [1909-2005], the basic task of management includes both marketing and innovation. Practice of modern management originates from the 16th century study of low-efficiency and failures of certain enterprises, conducted by the English statesman Sir Thomas More [1478-1535]. Management consists of the interlocking functions of creating corporate policy and organizing, planning, controlling, and directing an organization's resources in order to achieve the objectives of that policy. Project management: This is the application of processes, methods, knowledge, skills and experience to achieve the project objectives. Project management; is the process and activity of planning, organizing, motivating, and controlling resources, procedures and protocols to achieve specific goals in scientific or daily problems. Management is frequently used as an enabler for meeting an uncertain and turbulent environment. Consequently, the overall effectiveness of the project management process is essential for long-term profitability. The aim and final effects of project management are to predict the outcome, i.e. cost, time and quality. Uncertainty: We define uncertainty as a context for risks as events having a negative impact on the project's outcomes, or opportunities, as events that have beneficial impact on project performance. This definition stresses dual nature of uncertainty in potentially having both positive and negative influence on the project's outcomes. Uncertainty can arise from sources both internal and external to the project. [LeRoy & Singell, 1987] Uncertainty: in contrast, is an event or a situation, which was not expected to happen, regardless of whether it could have been possible to consider it in advance. In other words, uncertainty is when the established facts are questioned and thereby the basis for calculating risks (known negative events) or opportunities (known positive events) is questioned. [Own Definition] Uncertainty: This is a term used in subtly different ways in a number of fields; it applies to predictions of future events, to physical measurements that are already made, or to the unknown. Uncertainty arises in partially observable and/or stochastic environments, as well as due to ignorance and/or indolence. However, uncertainty is inherent in the objectives of the project itself, as we use assumptions and expectations in defining and realizing the outcome of the project. A project's ability to identify and react to uncertainty will influence the outcome of the project. [Wikipedia]