Cost v Benefits

Over a series of posts I will summarize what I learnt from the excellent book by Dan Ariely “The honest truth about dishonesty” and talk about how the lessons apply to project management. It is an excellent book and one that I highly recommend that you buy.

I discovered Dan Ariely through the enlightening “Behavioural Economics” course on edx.

From Gary Becker’s work in rational economics the cause of dishonesty is the result of rational analysis of each situation. For example, one day Becker was running late for a meeting and due to a lack of legal parking he parked illegally and risk the ticket.

The pain of the risk of getting caught and being fined was seen as less bad than missing the meeting.

Costs v benefits not right v wrong.

This resulted in the simple model of rational crime. We all do a cost v benefits analysis to decide if we do something illegal or morally wrong.

In summary, Becker’s theory is that we act honestly of dishonestly as a result of costs benefit analysis.

How does this apply to project management?

Before a project is started the organisation must perform a cost v benefit analysis of the project. This includes the cost v benefit of not doing the project as well.

Why do I say that analysis should be done on not doing a project? As in the example above, Gary Becker risked the chance of getting a parking ticket as he thought the benefit would outweigh any possible fine.

Some organisations may decide risk a fine or not be first to market with a new product as they believe the punishment is less than the costs to avoid the fine or to be first to market.

This means that a project is not done as the benefits do not outweigh the costs (yet). When the benefits are greater than the costs the project will begin.