Tag Archives: risk management

The Endowment Effect: The Ultimate Organizational Rose-Colored (Risk-Enhancing) Glasses

Fifteen or so years ago, I was a member of a review team that assessed a major, multi-million dollar software project. We were asked to perform the review because the project had some issues — it cost nearly $2M a year, was not yet delivering value to users, and had been running for 17 years.

Were I the ultimate decision-maker, my plan of action would have been simple: shut down the project, reconstitute a team with some representation from the old team, and use the lessons learned to rearchitect a newer, more robust solution. It would have customer involvement from the start to ensure a short time-to-value (and continuous flow of value). But there was one complication: the subject matter for this software package was highly specialized and required active involvement from people who had deep knowledge of the problem domain… and the team already had about 60% of the world’s experts on it.

Still, I was focused on the sunk costs. I felt that the organization should not choose to keep the project going just because over $20M had been poured into it… the sunk costs should not factor into the decision.

But then something very curious happened two years later, as the project was still hemorrhaging money… I was put in charge of it. So what did I do? Launched a two-month due diligence to reassess the situation, of course.

I was not on the review team this time, but their assessment was not a surprise — can the project, reconstitute the team, use the lessons learned to plan a new approach to delivering value quickly.

So that’s what I did… right? NOOOOO!!! I decided to try a little harder… because of course we could get the current software project to be stable and valuable, if we just gave it a little more time.

Even I was shocked by my transformation. Why was I feeling like this? Why was I ignoring the facts? Why was I, all of a sudden, powerless to make the appropriate and most logical choice?

Turns out, I was just demonstrating human nature via the Endowment Effect — which says, simplistically, that once you own something you value it more than before you own it. This is not just a curiosity though… because it can get in the way of effective decision-making.

Think about it:

  • Before you buy a house, you psychologically devalue it because you want to get a better deal. But once you move in, your psyche inflates the value because you stand to win as the value increases.
  • Why is it that leaders often value the opinions of consultants more than the opinions of full-time staff? Because consultants are more expensive, and once their reports have been submitted, you now own the intellectual property… and value it more.
  • The same effect occurs if you buy a company. You may be sensitive to issues and opportunities for improvement prior to the sale, but once your signature is on the dotted line… the endowment effect kicks in, and the rose-colored glasses are donned.

This has a huge implication for quality and process improvement. Once you own something, you are less able to see the problems that need to be solved. This is why we use external auditors for our ISO 9001 programs, or review panels for our government projects, or a quality award assessment process for evaluating how well we are translating strategy to action.

Other people can see areas for improvement that you can’t, if you’re an owner of the process that has problems. The lesson? Get external eyes on your internal issues, and pay attention to their insights.

Why FEMA is Monitoring Waffle House this Weekend

This article originally appeared on the Intelex Community on 9/14/2018 at https://community.intelex.com/explore/posts/why-fema-monitoring-waffle-house-weekend Sometimes the most informative metrics show up in the strangest of places. Case in point: with a hurricane making landfall today in North Carolina, and the prospect for catastrophic flooding over the weekend and into next week, emergency managers are mobilizing for action – and if you’re in the path of the storm, you may be doing the same. Have you started monitoring the Waffle House Index? The US Federal Emergency Management Agency (FEMA) has. Originally devised by W. Craig Fugate, former FEMA Director, the Waffle House Index is based on the observation that the popular 24-hour breakfast chain has historically been unusually well prepared for disasters. Part of their business model is to be the spot for emergency personnel to rely on for their coffee and nourishment – a valuable role when power crews, rescue teams, and debris removal workers are working long, hard hours. To do this, they make sure all employees have disaster training and stock all their restaurants with generators, and have a reduced menu specifically to be offered in the aftermath of a disaster. Over time, this even led to a more formal partnership between the organizations. FEMA first responders are known to set up initial operations in Waffle House locations. Waffle House now reports the status of each location to FEMA after a disaster to facilitate data collection. The Waffle House Index is a red, yellow, or green marker placed on a map wherever a Waffle House location is found. Under normal conditions, the marker is green. If the restaurant has shifted into emergency operations and is offering their limited menu, the marker is yellow. If the marker is red, that means that the Waffle House is closed – either the site itself is damaged or destroyed, emergency staff can not reach the site, the emergency generators are down or out of fuel, or there is a food shortage. When FEMA sees one or more reds, they know an area is in particularly bad shape – and they’ll need to help. What can you learn about risk-based thinking from the Waffle House index? Three things: first, that you can (and should) look outside your organization for risk indicators that might help you make better (and faster) decisions, particularly when those risks are activated. Second, that you should explore crowdsourced risk data as a source of up-to-date information. And finally – if Waffle House is closed, there’s a serious problem.   Additional Reading: McKnight, B., & Linnenluecke, M. K. (2016). How firm responses to natural disasters strengthen community resilience: A stakeholder-based perspective. Organization & Environment, 29(3), 290-307. Walter, L. (2011, July 6) What do waffles have to do with risk management? EHS Today. Available from https://www.ehstoday.com/fire_emergencyresponse/disaster-planning/waffles-risk-management-0706

Management Improvement Carnival #161

It’s been a long time! Although I haven’t served in this role since the spring of 2009, I am pleased once again to host ASQ Influential Voices blogger John Hunter’s Management Improvement Carnival, featuring some interesting or noteworthy articles that have been posted over the past couple weeks. Be sure to check out previous installations of the Carnival to get a broad sample of the most recent blog posts that are relevant to managers who are interested in quality, innovation and process improvement.

My top recommendation is Lotto Lai’s review of a recent symposium in Hong Kong, entitled “One Year After the Fukushima Nuclear Accident – the Way Forward with Safety and Risk Engineering.” (3/10/2012) This is a really fascinating and comprehensive look at the Fukushima disaster from the quality management perspective. I particularly like one of his slides about 60% of the way through the presentation that presents a 2×2 grid detailing probabilistic and deterministic approaches to the design that were intended to enhance plant safety. I really like this grid and will be thinking about ways to apply them to problems that I encounter in my job and my consulting (fortunately, none of which involve managing nuclear power plants).

On a lighter note, I also enjoyed “Coffee Shop Buzz is Good for Your Creativity” from Lifehacker. (3/6/2012) Have you ever thought that maybe the social pressure around you is what helps you get things done at the coffee shop? Hmmmm.

Oh, and we can’t forget St. Patrick’s Day! In preparation for the big weekend, Carly Barry at Minitab blogged about “The Odds of Finding a Four Leaf Clover” (3/16/2012). If you’ve ever struggled with odds ratios to compare the likelihood of two events, this article might give you the example to clear it up for good.

My newest “find” in the realm of quality and management improvement blogs is David Kanigan’s “Lead.Learn.Live” at davidkanigan.com. I so love the interconnected nature of blogs… a couple weeks ago, he “liked” something on my blog, and I decided to go check out his blog. And I really like his too! David intersperses original business-oriented posts with cited snippets of art and inspiration, and posts at least on a daily basis. Here are some of the most recent:

He calls attention to one of David Allen’s posts in “Gnawing Sense of Anxiety about Un-Captured Work” (3/10/2012) reiterates some of the themes I have been reading about in Baumeister’s excellent 2011 book on willpower. Apparently, our unconscious is totally restless when we have tasks on our to-do lists for which no plan exists to address. Once we set up a plan (e.g. “I’m going to schedule Saturday morning to download and look at that new data!”) our unconscious gets real happy, lets go of its silent panic, and we’re less overwhelmed and less distracted. Pretty cool!

In “The Process of Pivoting” (3/10/2012) David encourages us to move to a better feeling if we’re brought down by a problem, or a challenge, or some coworker’s crappy attitude at work. He doesn’t actually say any of those things, but you should be able to easily relate to the general scenario.

How can magical thinking be a solid tool for people who want to improve quality and performance – especially while managing teams? Find out in The Poison of Performance Appraisals (3/10/2012)… Deming would agree.

(And although this isn’t technically a blog, they do use a blogging infrastructure behind the scenes, so…) Hot off the presses we have “A Flash of Green Enhances Creativity” (3/20/2012)… did you know that temporary exposure to the color green can enhance inventiveness? Researchers reported in the Personality and Social Psychology Bulletin that experiments were conducted where people were asked to solve problems surrounded by either green or red borders. It didn’t matter whether you were male, female, short, tall, or Australian… everyone was a better problem solver “in the green”. This also brings a new meaning to “Green Flash” 🙂