a far superior level of service at a lower cost (implicitly ignoring the risks that this might not be achievable). Once the business has been secured, then “unexpected” items start to occur, by which time it is too late to reverse the contract award. Unless the negotiated contracts have clear service-level agreements and penalty clause elements that are adequate to compensate for non-delivery on promises, such deliberate “low balling” tactics by potential suppliers may be rational; on the other hand, if one bids low and is contractually obliged to keep to that figure, then a range of significant difficulties could arise, so that such tactics may not be sensible.
• Often clauses may exist in contracts that would only apply in exceptional circumstances (such as if consequential damages may be sued for if a party to the contract delivers a performance that is materially below expectations). During contract negotiations, one or other party to the contract may insist that the clause should stay in the contract, whilst maintaining that it would never be enforced, because such circumstances could not happen.
Specific examples that relate to some of the above points (and occurred during the time at which this book was in the early stages of its writing) could be observed in relation to the 2012 Olympic Games in London:
• The Games were delivered for an expenditure of approximately £9bn. The original cost estimate submitted to the International Olympic Committee was around £2bn, at a time when London and Paris were in competition to host the games. Shortly after the games were awarded to London in July 2005, the budget estimate was revised to closer to £10bn, resulting (after the Games) in many media reports stating that they were “delivered within budget”. Some of the budget changes were stated as being due to heightened security needs following a major terrorist attack that occurred in London shortly after the bid was awarded (killing over 50 people). Of course, one can debate such reasons in the context of the above points. For example, the potential terrorist threat was already quite clear following the Madrid train bombings of 11 March 2004 (which killed nearly 200 people), the invasion of Iraq in 2003, and the attacks in the United States of 11 September 2001, to name a few examples; security had also been a highly visible concern during the 2004 Athens Olympics. An external observer may hypothesise that perhaps a combination of factors each played a role to some extent, including the potential that the original bid was biased downwards, or that the original cost budget had been estimated highly inaccurately. In any case, one can see the difficulty associated with assigning definitive responsibility in retrospect, and hence the challenge in ensuring that appropriate decisions are taken in the first place.
• A private company had been contracted by the UK government to provide the security staff for the Games; this required the recruitment and training of large numbers of staff. Despite apparently having provided repeated reassurances that the recruitment process for the staff was on track for many months, at the last minute (in the weeks and days before the Games) it was announced that there was a significant shortfall in the required staff, so that several thousand soldiers from the UK Armed Forces were required to step in. An external observer may hypothesise that the private company (implicitly by its actions) did not perceive a net benefit to accepting or communicating the existence of the risk of non-delivery until the problem became essentially unsolvable by normal means.
Cognitive biases are those that are often regarded as resulting from human beings' evolutionary instinct to classify situations into previously observed patterns, which provides a mechanism to make rapid decisions (mostly correctly) in complex or important situations. These include:
• Optimism. The trait of optimism is regarded by many experts as being an important human survival instinct, and generally inherent in many individual and group processes.
• Bias to action. Management rewards (both explicit and implicit) are often based on the ability to solve problems that arise; much rarer is to create rewards around lack of action, or for the taking of preventive measures. The bias to action rather than prevention (in many management cultures) can lead to lack of consideration of risks, which are, after all, only potential and not yet tangibly present.
• Influence and overconfidence. This refers to a belief that we have the ability to influence events that are actually beyond our control (i.e. that are essentially random). This can lead to an overestimation of one's ability to predict the future and explain the past, or to an insufficient consideration of the consequences and side effects. A poor outcome will be blamed on bad luck, whereas a favourable one will be attributed to skill:
• A simple example would be when one shakes dice extra hard to try to achieve certain numbers.
• People may make rapid decisions about apparently familiar situations, whereas in fact some aspect may be new and pose significant risks.
• Arguably, humans are reasonable at assessing the effects of, and managing, individual risks, but much less effective at assessing the effects and combinations when there are multiple risks or interdependencies between them, or where the behaviour of a system (or model) output is of a non-linear nature as its input values are altered.
• Anchoring and confirmation. This means that the first piece of information given to someone (however misleading) tends to serve as a reference point, with future attitudes biased to that point. New information becomes selectively filtered to tend to try to reinforce the anchor and is ignored or misinterpreted if the information does not match the pre-existing anchor. One may also surmise that many educational systems (especially in the earlier and middle years) emphasise the development of students' ability to create a hypothesis and then defend this with logic and facts, with at best only a secondary focus on developing an enquiring mind that asks why an analysis or hypothesis may be wrong. The bias of confirmation describes that there is typically more focus on finding data that confirm a view than in finding data to disprove or question it.
• Framing. This means the making of a different decision based on the same information, depending on how the situation is presented. Typically, there is a different behaviour when faced with a gain versus when faced with a loss (one is more often risk seeking when trying to avoid losses, and risk averse when concerned with possible gains):
• A consumer is generally more likely to purchase an item that is reduced in price from $500 to $400 (that is, to “save” $100), than to purchase the same item if it had always been listed at $400.
• An investor may decide to retain (rather than sell) some shares after a large fall in their value, hoping that the share price will recover. However, when given a separate choice as to whether to buy additional such shares, the investor would often not do so.
• Faced with a decision whether to continue or abandon a risky project (after some significant investment has already been made), a different decision may result depending on whether the choice is presented as: “Let's continue to invest, with the possibility of having no payback” (which is more likely to result in the project being rejected) or “We must avoid getting into a situation where the original investment was wasted” (which is more likely to result in a decision to continue).
• Framing effects also apply in relation to the units that are used to present a problem. For example, due to a tendency to think or negotiate in round terms, a different result may be achieved if one changes the currency or units of analysis (say from $ to £ or €, or from absolute numbers to percentages).
• Incompleteness. Historical data are inherently incomplete, as they reflect only one possible outcome of a range of possibilities that could have occurred. The consequence is that (having not observed the complete set of possible outcomes) one assumes that variability (or risk) is lower than it really is. A special case of this (sampling error) is survivorship bias (i.e. “winners” are observed but “losers” are not). For example:
• For stock indices, where poorly performing stocks are removed from the index to be replaced by stocks that have performed well, the performance of the index is overstated compared
