Real-World Project Management: Risk and Poker
Last night was poker night. We had the usual poker accessories: felt tabletop; clay chips; cards from Binion's Casino; and the mandatory beer, scotch, and cigars. What more can a guy ask for?
A straight flush would have been nice. My buddy Mick crushed me with his straight flush (I did, at least, have the flush). See Figure 1 to feel my pain. My hand is on top; Mick's winning hand is below mine.
You're familiar with Texas Hold 'Em poker, right? I'm sure you've seen the recent poker trend: oddballs with goofy glasses, good luck charms, and pre-game rituals. Whatever. The cards are just going to fall the way they're going to fall. Nothing, from your lucky rabbit foot to your favorite T-shirt, is going to change that.
Risk and the Poker-Playing Project Manager
The risk, the point of this article, is how much you're willing to wager based on what's in your hand. The more you wager, that is, the more you risk—the more you could win or lose. Your willingness to accept risk is called your utility function.
Not to be a nerd (I know, too late), but utility function is a microeconomics terms related to Bernoulli's curve. Basically it describes your comfort of investment in relation to how much you're willing to risk for your return.
Your winnings as a result of the risk you've taken is called the reward. What you risk is always in proportion to your reward. You experience risk and reward all the time, not just in poker and project management:
- We all take risks when we drive on any highway, but we consider the risk low, so we accept the odds that we'll arrive safely. The reward is that driving is faster than walking.
- Play golf? Do you take the risk and shoot over water, or do you play it safe and lay up and shoot again? The risk is that your ball may go swimming, but if you clear the hazard you're up a stroke. Brilliant!
- Invest some cash in the stock market? You can put lots of cash in IPOs that may make you a bazillionaire or leave you broke.
In business, as in life, there are two big umbrellas of risk: pure risk and business risk.
- Pure risk is not good. Pure risks are things like fire, loss of life or limb, and dangerous types of work. For these risks, we usually take extra precautions to ensure safety: fire hydrants, hard hats, OSHA rules, and so on. Pure risks typically only have a downside.
- Business risk is where most of our projects are concerned. Business risks can have an upside or a downside. For example, we may identify a risk in our project that we need two software developers to complete the work within three months. The cost to hire a third developer to hit the deadline is $75,000. We predict that we'll be late by two weeks and our penalty for being late is $10,000. We decide to accept the risk that our two developers will not be later than two weeks and drop the $10,000 rather than spend the additional $75,000.