PERT analysis

The 1950s were a time of great innovation and advance, some developments like the Hula Hoop and the Hovercraft may well resulted individual effort in inspiration but some – like the space race was motivated by the need to win the Cold War. When the Soviets launched Sputnik in 1958, the Americans became convinced that their project management system was deeply flawed and launched a number of initiatives aimed at tacking this deficiency. One of these – instigated by the US Navy – was the Project Evaluation and Review Technique or PERT.

After looking at the outcomes of hundreds of projects, the use of PERT analysis concluded that – as Helmuth von Moltke the Elder said 100 years previously, “No battle plan survives the first contact with the enemy”  Another way of saying that single outcome predictions are pointless, Molktke was himself drawing on work by Napoleon 50 years earlier still when he wrote that “Plans are usually useless but time spent planning is invaluable” a reference to the benefits of scenario planning for the variety of different possible outcomes which may befall and decision, action or endeavour.

Specifically, PERT analysis concluded that – while projects almost never hit their original targets (sometimes coming in over budget, rarely under) a more effective way of estimating the time and money needed was to aggregate together various optimistic, pessimistic and realistic estimates giving each one a weighting according to its likelihood (or probability). While theoretically every organisation would have different probabilities, the ones created by the US Navy fit most purposes and are as follows.

Since people’s estimates were usually optimistic because people naturally overestimate how much of any system they can control and put the interventions of fate down as freak occurrences which – now the lessons have been learned will not happen again… the weighted estimate was to be four times the most pessimistic plus the realistic, plus two times the optimistic, divided by seven or:

4P  +   R  +  2O

7

Crucially the point of this analysis was NOT to tame uncertainty in the sense that the result would magically predict the future, but rather the figure created – along with the other figures for other projects would correctly predict the average time and budget needed. The figure produced is essentially just an expectation calculation. Instead of two possible outcomes (win or lose) in this case there are three and they are weighted according to their probabilities in exactly the same way as the win or lose figures were.

In this sense though – since the actual result was going to be roughly one of the three figures, PERT analysis represents an industrial game of Deal or No Deal with seven boxes containing the following amounts:

Optimistic
Optimistic
Realistic
Pessimistic
Pessimistic
Pessimistic
Pessimistic

At some point one of the boxes will be opened and that will be the result but until that time all we have is the multi outcome expectation. Until then, there is no “one” future but many possibilities, each with its own attendant probability. This is one of the reasons for James Surowiecki’s observation in The Wisdom of Crowds that expert forecasts are usually less accurate than the combined guesses of a crowd of people of people who are diverse, independent and decentralized. The aggregation of such different opinions acts as a kind of Montecarlo analysis that gives all possible futures consideration in the calculation and produces a kind of “expectation” or average of all possible futures. (See Chapter Two)

Indeed when people throughout history have made single outcome predictions and prognostications, they are setting themselves up to fail: “Who the hell wants to hear actors talk?” asked Jack Warner. Everything that can be invented has been invented” declared Charles H Duell, Commissioner of patents in 1899. “640KB ought to be enough for anybody.” Said Bill Gates in 1981

And we don’t laugh at any of these individuals: they were the best guesses that we had from experts in their field. If someone had told you in August 2001 that the world’s airlines would lose more money in the next 18 months than they had collectively made in profit since their inception you’d have thought they were crazy and yet that is exactly what went on to happen. If someone had told you in spring 2008 that Britain’s banking system would be all but nationalized by Christmas…?

The only meaningful way of talking about the future is to use the language of probability. By doing so we not only avoid the pitfalls of “pinning our colours to the mast” we also manage to tame uncertainty as well as we can – just ask any project manager!

Posted 01:48pm by Caspar and filed in Innovation, Uncertainty