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There is a natural tendency towards mitigating threats over the pursuit of opportunities. This is a consequence of 鈥榣oss aversion,鈥� which is recognised in Daniel Kahneman and Amos Tversky鈥檚 鈥楶rospect Theory鈥� of human decision-making psychology. Loss aversion helps us survive life or death situations, but we can allow this survival instinct to undermine project delivery. Kahneman reminds us that in many modern society situations, gains compensate for losses in equal measure. When this is the case, he advises us to 鈥榯hink like a trader鈥� to avoid the economic impact of our loss aversion.

Working with contractors and clients across the construction industry, we have seen how loss averse cultures reward threat management ata the expense of opportunity management, which hijacks decision-making, and harms projects鈥� chances of success. Yes, we must consider the non-financial consequences and indirect costs of threats, and yes, we must recognise the investment cost of opportunity management, but we must also recognise that projects are long-term endeavours where gains compensated losses. Measured risk taking is valuable, worth investing in and worth rewarding.

The Infrastructure Projects Authority states that 鈥渆ffective risk management is critical to project success,鈥� and we agree that it is necessary to prevent the overruns that plague large construction and infrastructure projects. However, many project organisations establish risk management frameworks but remain frustrated: teams attend workshops, populate databases, but totally miss the target.

Proactive opportunity identification in value management workshops takes place when the threat of a project decision or stage gate failure looms, but it鈥檚 disappointing to see efforts to realise opportunities dissipate when the project decision point passes. Despite best endeavours, opportunities to exceed the target are rejected by risk-averse decision-making, and left forgotten in value engineering reports.

Megaproject organisations may invest to increase risk management maturity, but if an imbalance of threat management over opportunity management is allowed to endure, these investments may not deliver greater confidence of success.

Why we focus on the downside

In their 1979 Nobel Prize winning work, Kahneman and Tversky examined 鈥楶rospect Theory鈥�, which helps us understand our loss-averse decision-making in the face of uncertainty. As individuals, we fear loss relative to the status quo (of money, jobs, relationships, status) more than we like gaining things. Conversely, in the face of near-certain loss we may take inappropriate risks to avoid it.

Our survival may have depended on defending territory and avoiding risk-taking except when there is nothing else left to lose, but we should not let these instincts drive present day decision making. At work, they may prevent us from speaking out, fearing the impact of dismissal. If we see a colleague face criticism when a promised benefit does not arise, potential regret or humiliation may prevent us from taking valuable risks.

In project environments, reward systems are often based on behaviours, rather than outcomes, because the direct causes of losses and gains are not obvious. If a loss-averse mindset pervades, people may use risk management to justify 鈥榩laying it safe鈥� instead of using it to promote measured risk taking; risk taking is punished, and we see all uncertainty as bad. For contractors, many contracts are not even structured to capture the value positive outcomes, leaving little organisational incentive for project supply chains to look for opportunities to improve client outcomes. 

Whilst for some risks, such as safety, we are justifiably loss-averse, and we must recognise the costs of pursuing opportunities, effective project teams take time to seek out and capitalise on beneficial uncertainties; threats are managed but not to the exclusion of opportunity management. When the upside of risk management is understood, its potential to counteract the inevitable losses from some risks occurring is recognised; successes and efforts are praised, and failures drive learning.

For commercial entities, the drive for effective opportunity management comes through effective reward. 

Back to Kahneman: his advice to 鈥楾hink like a trader鈥� invites us to realise the benefit of taking multiple opportunities. Take five risk averse project managers, each with an independent 40% chance of gaining 拢50M, or losing their 拢5M investment costs, if they pursue their opportunity. The 拢17M average gain (40% x 拢50M + 60% x -拢5M) for each manager may not be enough to overcome the fear of a likely loss. However, the average total gain if all five pursue their opportunities is 拢85M, and a quick Monte-Carlo analysis reveals the chance of net loss is less than 8%. More opportunities mean more confidence of net gain 鈥� the chance of loss across ten of the same opportunities is less than 1 in 100. The net threat quickly becomes small; funders might consider project directors ignoring these opportunities to be reckless!

Andrew Allen and Paul Mansell are senior risk, opportunity and commercial practitioners at HKA