Optimal strategies for selecting project portfolios using uncertain value estimates

Practically all organizations seek to create value by selecting and executing portfolios of actions that consume resources. Typically, the resulting value is uncertain, and thus organizations must take decisions based on ex ante estimates about what this future value will be. In this paper, we show that the Bayesian modeling of uncertainties in this selection problem serves to (i) increase the expected future value of the selected portfolio, (ii) raise the expected number of selected actions that belong to the optimal portfolio ex post, and (iii) eliminate the expected gap between the realized ex post portfolio value and the estimated ex ante portfolio value. We also propose a new project performance measure, defined as the probability that a given action belongs to the optimal portfolio. Finally, we provide analytic results to determine which actions should be re-evaluated to obtain more accurate value estimates before portfolio selection. In particular, we show that the optimal targeting of such re-evaluations can yield a much higher portfolio value in return for the total resources that are spent on the execution of actions and the acquisition of value estimates.