The Utility Concept in Decision Making

When the project manager begins to apply the decision policy to the project situation, the risk attitudes of the decision makers need to be taken into account. If the decision maker is risk neutral, then the decisions will be based on the risk-adjusted estimates without regard to the affordability of the downside or the strategy to exploit the opportunities of the upside.

Decision inputs, constraints, and assumptions

Figure 4-1: Context for Decisions.

Policy foundation

However, decisions are rarely risk neutral if the amount at stake is material to the well being of the organization. In situations where the decision making takes into account the absolute affordability of an opportunity, we call decision making of this type "risk averse." A quantitative view of this concept is embodied in the idea of "utility." Utility simply means that the decision maker's view of risk is either discounted or amplified compared to the risk-neutral view. Figure 4-2 shows this concept. The principal application to projects is evaluating the downside risks attendant to one or more alternatives that are up for a decision. Regardless of the advantageous expected value of a particular opportunity, if its downside is a "bet the company" risk, then the decision may well go against the opportunity.

Bioavailability
Figure 4-2: Utility Function.

[1]These principles of decision policies are a summarization of the author's experience in many project situations over many years. The material is an expansion of that given in the author's book, Managing Projects for Value. [2]

[^Goodpasture, John C., Managing Projects for Value, Management Concepts, Vienna, VA, 2001, chap. 3, p. 39.

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