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Ian Clarkson: Business Cases

Ian Clarkson: Business Cases

Psychology is something that interests me. It is a subject that I have never studied, but I find fascinating. Although I’m not an expert on the subject, I find the mind’s workings fascinating. Two books have made a profound impact on my outlook on life, work, and relationships. The first is “I’m OK You’re Ok” by Thomas Harris, while the second is “Thinking, Fast, and Slow” by Daniel Kahneman, a prominent psychologist and Nobel Prize in Economics winner.
Professor Kahneman discusses two systems in the second of the two above. System 1 and System 2, which influence and govern how intuitive judgments are made. System 1 is an automatic operation over which we have no control (e.g. System 1 is a simple operation that we can instantly look at someone to form an opinion about them. System 2 is more complex and conscious activities (e.g. Complex calculations are required. Refer to pages 20-21 for more information.
This book has been fascinating me. I also found it very introspective. The author discusses substitution, the operation of answering one (usually easier) question in place of another (the original more difficult) question. He also talks about affect heuristic, where people let their likes or dislikes dictate their beliefs about the world. Daniel Kahneman gives the following example at the end (page 104).
“He likes the project so he believes its costs are low and its benefits high. This is a great example of affect heuristic.
Are we seeing this when presenting business case for approval? Projects are being forced to ‘compete for budget approval. This is most likely due to the current economic climate, which has increased emphasis on minimizing ‘unqualified’ spending. In essence, portfolio management.
Is it possible to combine the influence of substitution with the affect heuristic when creating business cases? If the original (harder), question being answered by the business cases is “is it a worthwhile project?” then the author of the business cases is actually guilty of answering the second (easier question) question: “do you like this project?” If “yes”, this is the manifestation the affect heuristic in business case.
The individual may be more inclined to exaggerate the benefits than the costs if they like the project. But is this true? This is because he dislikes the project and believes its costs are too high while its benefits are too low.
My gut says “no” (opinions welcome) What business case would you write that said “Don’t invest, this project is not worth it”? The theory and best practice say that the business case should justify the investment. However, it is possible that the project is not as worthwhile as other proposals, and the investment decision is therefore’rejected. This is not saying “Don’t invest – this is not worth it” – it’s saying “now is not a good time to invest”.
According to my understanding (my apologies for the Professor Kahneman if I am wrong), substitution and affect heuristic are both functions of System 1. In which case, if System 1 has voluntary control, are we predisposed to create ineffectual business situations (unerring optimism oder pessimism). Absolutely not! Absolutely not!
Here are a few suggestions to help you overcome this “System”

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