Posted by George Huhn on Tue, Apr 13, 2010 @ 03:24 PM
Do you want to get a higher price when you sell something at auction on eBay?
After running hundreds of controlled auctions on
eBay, researchers reported in the
INFORMS journal
Decision Analysis that longer auctions yielded more bidders and more bids resulting in an 11% average final price increase compared to the shorter auctions.
When you sell an item on eBay, you can choose auction durations ranging between 1 and 10 days. The researchers studied the differences between 1 and 3 day auctions by auctioning identical items simultaneously with one item in a 3-day auction and the other in a 1-day auction, but both ending on the same day. The also ran an additional 241 control auctions in which the durations for the identical item pairs were the same.
In total, there were 1,223 unique bidders and only 202 of them placed bids simultaneously in a paired auction. Interestingly, they analyzed their data set to see if the higher prices from longer auctions could be attributed to more bids and/or more bidders, but they found that could only partially explain the results.
They also conducted another set of studies on local auction sites with similar formats as eBay, but that had much smaller groups of potential participants. These studies compared auction durations of 1 day versus 10 days. Here they found the opposite effect: shorter auctions resulted in average final prices that were 16% higher than the longer auctions.
The authors caution that these studies are not directly comparable due to a variety of differences in experimental controls and design considerations, and should be therefore be considered primarily as "two separate investigations of the effect of duration on prices in two auction platforms."
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Posted by George Huhn on Mon, Feb 22, 2010 @ 05:25 AM
"Does it make the decision for me?"
That's a question that somebody asked me again last week, and it is a question that I hear often from people when I tell them about our software. Underneath this question there is an unspoken worry that using a decision analysis tool will somehow override their often very good subjective decision-making ability and authority. I answer it by explaining that it is something like the difference between digging a basement for a house with a hand shovel or a using back-hoe: you still get to choose where and how the basement is dug (the most important subjective decision), but the back-hoe will give you a much faster and better result.
In other words, a good decision analysis tool will enhance and support your subjective judgment by giving you a wider and more focused view of your alternatives.
Decision analysts like to say that they help people make "more objective decisions." This is true if the methodology is sound. (By the way, that is a big "if." Lousy methodology can make things worse.) But in complex and unique business decisions, objective analysis doesn't mean that you can just feed in some numbers and out pops the perfect answer. Instead, a good decision analysis tool will move the subjective analysis to a higher and more strategic level of the decision-making process while leaving the objective number-crunching to the application.
In project portfolio analysis, even using sophisticated tools like Optsee®, there is still a lot of subjectivity that enters into the analysis. For example, there's project risk assessment, budget estimates, and NPV valuations, just to name a few. Then there's assigning weights to the criteria so the project ranking reflects your company's strategy. Finally, there is trying different budget and optimization strategies to select a portfolio that brings you the highest value based on your project set, budget and resource constraints, and business goals.
How is this more or less subjective than doing it manually?
Using spreadsheets or labor-intensive "one model at a time" analyses bog you down in a very low tactical level of subjectively trying to find an optimal portfolio, one project at a time, from billions of possible portfolios. And when you're doing it as a team, this process can quickly become tedious and non-strategic as discussions focus on arguing over the subjective criteria of including or excluding individual projects while losing sight of the big picture.
In other words, when you're at the bottom of a basement digging with a shovel, it is hard to see what the whole thing looks like from the top.
With a portfolio and budgeting analysis tool like Optsee®, you move way up the strategic scale, from picking projects to build a portfolio to picking an optimized portfolio from a few already-optimized alternatives. The "objective" parts – ranking the projects based on value and optimizing against different combinations of business constraints – has already been done for you. So you get to focus your time, energy, and judgment on the most important strategic question – how you can allocate you company's resources to get the highest return from your portfolio.
Like using a back-hoe instead of a hand shovel to dig a basement, using software that moves you up from just making tactical decisions to making more strategic decisions makes sense. But are there places in your company where you're still digging basements with shovels?
What are the best uses of your company's dollars and resources? Optsee
® can tell you. Optsee
® is a project portfolio management and budgeting optimization tool unlike any that you've ever seen.
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Posted by George Huhn on Mon, Jan 04, 2010 @ 02:08 PM
If you don't know the values and costs of not executing your projects then you're probably not maximizing the value of your project portfolio and you may be working on the wrong projects.
When project portfolio managers meet to decide which projects that their businesses are going to execute and which they are going to reject, they often have a summary business case for each project that includes the business value and attributes. Business attributes can include selection criteria such as
net present value (NPV),
return on investment (ROI), costs, resource requirements, and risks.
Thus, when the managers select a project to execute, the value and associated costs of the project are added to the total portfolio value and costs, respectively. When they reject a project, usually the identical "if-executed" values and costs are subtracted from the total portfolio because there is no separate evaluation of the value and costs of not executing the project. Therefore, the value of a rejected project is essentially set to zero by default and the total portfolio loses value.
When they reject a project in this way, any intrinsic positive or negative values and costs derived from not executing the project are not factored-in to the final portfolio. And when these values and costs are not factored-in, the total portfolio value and cost can be dramatically over- or under- estimated.
There are many ways a project can add or subtract value from a portfolio. Even projects that have negative individual ROIs can add value, such as a project that adds revenue to a product line because of its strategic fit. Analogously, there are many ways that not executing a project can add or subtract value from a portfolio. For example, positive value can come from increased revenue streams if the rejected project would have cannibalized revenues from other products; and negative value can come from a loss of revenue from a product line that could have been enhanced by the executing the project. Costs that can be incurred from not executing a project might include costs associated with contract terminations, closing facilities, and reassigning resources.
So, perhaps counter-intuitively, you can see that rejecting (not executing) a particular project may actually add more real value to a project portfolio than selecting another project!
How can you ensure that you're capturing the value and costs of not executing a project?
For each potential project in your portfolio, you could create an associated "Not" project that includes the overall value for not executing the project calculated using the identical attribute categories (rewards, costs, risk, etc.). Then, before
optimizing the portfolio against constraints, you could set up a mandatory dependency between these two projects such that either the actual project is selected
or its corresponding "Not" project is selected. In this way, either the value and costs of executing the project OR the value and costs of not executing the project are included in the portfolio totals.
Of course, if the value and costs of not executing a project are truly "0" and do not impact the total portfolio value and costs, then you don't need to create an associated "Not" project.
In our
project portfolio management tool Optsee®, you can perform rigorous
project portfolio optimizations against multiple constraints (such as limited money and resources) while maintaining four different types of project dependency relationships, including an "Or" relationship. When you select the "Or" dependency relationship between two projects, either one project or the other (but not both) are included in the optimized portfolio. This way it is easy to set up and accurately analyze the real value and costs of your portfolios under different constraint combinations because you're factoring-in the values and attributes of both selected and rejected projects.
Do you currently assign values and costs to not executing projects in your project portfolios? What other suggestions do you have for capturing these values?
What are the best uses of your company's dollars and resources? Optsee
® can tell you. Optsee
® is a project portfolio management and budgeting optimization tool unlike any that you've ever seen.
Click here to find out more.
Posted by George Huhn on Thu, Dec 17, 2009 @ 05:43 PM
Sunk costs are the costs that have already been incurred and cannot be recovered. We aren't supposed to consider sunk costs when making rational investment decisions, only the future costs.
But people do anyway.
How many times have you heard someone say, "Well, since we've already spent this much on it, we might as well finish it." They're making their decision based on sunk costs.
Ideas have sunk costs, too, only they're different from economic costs. When we spend a lot of time thinking about and working on a new idea, it is hard to let go of it in our minds, even when it proves unworkable or unfeasible. So we keep mulling it over and eventually we can become over-invested in it.
And then we can't evaluate the actual outcomes rationally.
Take the current Health Care Reform debate. Some people have so much sunk into the idea that Health Care Reform must be passed that they want to see anything signed, regardless of what is in the final bill. Others have so much sunk into the idea that Health Care Reform can never be good that they don't want to see anything signed, again, regardless of what is in the final bill.
Both of these groups are basing their positions on their sunk investments into their ideas of Health Care Reform, and not necessarily on the future costs and benefits of what is actually currently being discussed.
About 12 years ago I worked on a potential new treatment for AIDS. It was a unique molecule that ultimately failed in clinical trials. Since then it has wandered as a potential treatment from one disease du jour to another and failed each time. Recently, I heard that it had been proposed as H1N1 flu vaccine booster, again, with no plausible scientific rationale.
So now it is just an interesting molecule with no proven clinical application or clear rational for using or trying it as a future treatment for anything else.
It is an idea whose time came and went more than a decade ago, yet the inventors just kept trying. They can't let it go, regardless of the fact that the odds for success are much longer now than they ever were. But the accumulated sunk cost of their initial promising idea keeps driving them to continue investing in it.
"If we only keep trying…"
Sometimes it is useful to deliberately stop and consider if you're continuing to work on an idea because of what you have already mentally and emotionally invested in it or because of its actual future potential.
And sometimes the only way to avoid investing more time in thinking about a once-good idea is to just start working on a new and different one.
What are the best uses of your company's dollars and resources? Optsee
® can tell you. Optsee
® is a project portfolio management and budgeting optimization tool unlike any that you've ever seen.
Click here to find out more.
Posted by George Huhn on Thu, Nov 26, 2009 @ 08:07 AM
The debate over global warming is heating up again. A group of allegedly stolen e-mails is giving fuel to the fire to those who believe that global warming caused by human activities or Anthropogenic Global Warming (AGW) is a scientific fraud of massive proportions.
However, the question shouldn't be whether or not global warming is caused by AGW. It isn't a yes or no question.
The question should be: What is the percent probability that AGW will have catastrophic effects (between 0 and 100% probability)?
(Those of you who truly believe that the percent probability is 0% can stop reading now. And if you don't believe that any kind of global warming is occurring then you can also stop reading.)
After we have estimated the percent probability, we need to estimate what the economic costs will be if AGW causes a global catastrophe because we did nothing to stop it.
Let's assume the costs would represent millions or billions of dead human beings, beneficial ecosystems destroyed, and mass extinctions of animal and plant species. (I recognize that putting this in sterile economic terms will seem heartless to many, but we don't really have another good way to put a number on it.)
Once we have these two values, we can calculate the "expected value" of the cost of AGW. We'd take the cost of a global catastrophe and multiply it by the probability of it occurring:
Cost($) * Probability of occurrence(%) = expected value of the cost of AGW($)
Once we have that value, it would be prudent of us to figure out what the cost and risks of trying to stop or ameliorate the severity of AGW would be. If the cost to stop it is less than the expected value of the cost of a global catastrophe caused by AGW and the associated risks trying are acceptable, then we're fools as a species not to consider paying the costs of trying to stop it.
What do you think the expected value is?
What are the best uses of your company's dollars and resources? Optsee
® can tell you. Optsee
® is a project portfolio management and budgeting optimization tool unlike any that you've ever seen.
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Posted by George Huhn on Tue, Nov 17, 2009 @ 12:36 PM
I’ve also been toying for the last several years with the idea of developing a turn-key module for senior undergraduates or graduate business students in project portfolio management and/or decision analysis using Optsee®. It would be similar to an assignment I had at Wharton in an R&D Management class taught by Professor Earnest Gilmont, except that we didn't use any software or decision analysis tools.
Each student would get a copy of Optsee® that is pre-loaded with an unoptimized portfolio of projects with pre-assigned attributes (such as rewards, costs, resources, risks, etc.) and sets of constraints created for a hypothetical company. The students would form teams, and each team would be assigned to take their set of projects and develop an optimized portfolio that was targeted for different strategic goals. For example:
- one team would develop a portfolio designed to make the company attractive for being acquired
- one team would develop a portfolio designed for implementing an outsourcing strategy
- one team would develop a portfolio to maximize short-term gain
- one team would develop a portfolio to maximize long-term sustainability
Each team would then put together a presentation and/or a paper presenting their portfolio and how they came to agree on it. This would require the team to agree on what attributes to use, the shapes of the attribute curves, the attribute weights, and what constraints they would need to apply.
I think that this could all be put into a nice educational package that would give students an excellent understanding of developing strategic project portfolios based on business goals through their own experiences and by seeing the different portfolios developed by their classmates. It would also give them a fundamental understanding and appreciation of multi-criteria or multiattribute decision analysis, prioritization using Monte Carlo simulations, and optimization against multiple constraints.
So I am curious. How did you learn about Project Portfolio Management? And if you're a professor, how do you teach it?
What are the best uses of your company's dollars and resources? Optsee
® can tell you. Optsee
® is a project portfolio management and budgeting optimization tool unlike any that you've ever seen.
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Posted by George Huhn on Thu, Nov 12, 2009 @ 02:27 PM
Researchers at the University of Münster in Germany have shown that people can be highly influenced in selecting financial assets simply by the way the risks are charted. Their study, published in the June 2009 issue of Decision Analysis, showed that people are significantly more likely to select data charted in one way versus the same data charted in a different way. They also showed that people who self-describe themselves as "risk averse" (as most people do) will prefer one type of data presentation over another type.
In particular, two types of commonly used data distribution curves were discussed: probability density functions (skewed bell curves) and cumulative distribution functions (S-type or logistic curves):
In multiple experiments involving subjects selecting financial asset models using data with "right skewness" in probability density plots, people were significantly more likely to select the model if it was instead displayed as a cumulative distribution function (S-type curve). For financial asset models data with "left skewness," the opposite was true; people were more likely to select it if the model was presented as a probability density plot (left-skewed bell curve). Furthermore, the researchers found that "Individuals that judge themselves as more risk averse show a stronger preference for right skewness."
The authors note that:
"The findings of this paper have several practical implications. First, in advertising their products a financial services firm may choose the presentation format that is most likely to induce specific preferences for the considered financial product. For example, the sales brochure of a mutual fund investing exclusively in growth firms may use a presentation format that induces a preference for right skewness. Similarly, a firm advertising a discount certificate, a financial instrument that implements a covered call strategy and thereby generates a left-skewed distribution, may use a density function to communicate the asset’s risk."
What are the implications of this if you're not an advertiser trying to pitch financial services to potential customers?
Well, if you do any kind of business analysis presentations, like project portfolio management analyses, you'll want to remember that the chart types that you select for your data can strongly influence your audience based on their unconscious preferences.
And if you're looking at charts in order to make a decision based on the data, be sure that you look at the data in different chart types so you don't make your selection based on your own unconscious preferences.
What are the best uses of your company's dollars and resources? Optsee
® can tell you. Optsee
® is a project portfolio management and budgeting optimization tool unlike any that you've ever seen.
Click here to find out more.