In a large study of mutual fund managers, researchers studied the relationship between a manager’s risk choices and their prior performance relative to their peers. They found that the relationship between a manager’s risk choices and prior performance, compensation, and job security was U-shaped. In other words, poorer performing managers with lower job security tended to make higher risk choices as did higher performing managers, whereas managers in the middle tended to make lower risk choices than the other two groups. The study was published in the April 2011 issue of Management Science.

Even though the performance of mutual fund money managers is easier to assess than other business or project managers, I think that this basic relationship between risk-taking and manager quality still applies. Good project managers know how to assess project risks and plan for contingencies when things don’t go as planned. They also know how to communicate expectations and lead well. Poor or inexperienced project managers don’t assess risks well, and therefore tend to over-promise and under-deliver on their projects, which leads to greater risk-taking as they try to catch-up.

In some ways, it is similar to gambling psychology where losing gamblers try to “make it all back” by taking higher risk bets whereas winning gamblers make higher risk bets based on their past successes and having more resources. The ones in the middle just keep placing small bets.

So, how do we teach inexperienced project managers to take risks in such a way that they stay off the left side of the “U” in the beginning and learn how to manage risks like great project managers as they move up the right side?



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