Published here February 2004. 

PART IV | Reason 5 | Definition of the Efficient Frontier
Finding the Frontier | PART VI

This is the fifth part of a six-part paper explaining the reasons organizations tend to make poor project choices. Part 1 described the common errors and biases in human judgment that distort decision-making. Part 2 described the error of failing to see the forest for the trees and provided recommendations for establishing a project portfolio management function. Part 3 described the need for metrics for evaluating and selecting projects. Part 4 described the importance of properly accounting for risk. This part describes Reason 5 why organizations choose the wrong projects, their inability to find the efficient frontier.

Reason 5: Inability to Find the Efficient Frontier

The goal for selecting projects is to pick project portfolios that create the greatest possible risk-adjusted value without exceeding the applicable constraint on available resources. Economists call the set of investments that create the greatest possible value at the least possible cost the "efficient frontier." Most organizations fail to find the best project portfolios and, therefore, do not create all of the value available. Inability to find the efficient frontier is the fifth reason organizations choose the wrong projects.

If the problems discussed in the previous parts of this paper are addressed, value-maximizing project portfolios can be found. Specifically, if the organization has the right metrics and models in place, including the ability to value risk, and it has taken steps to minimize errors and biases in inputs provided to those models, the capability exists to estimate the value that would be added by doing any proposed project portfolio. It is a relatively easy last step, then, to find the best combination of projects. The concept of efficient frontier is highly useful in this regard.


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