Risk Assessment and Decision Making in Business and Industry

Risk Assessment and Decision Making in Business and Industry: A Practical Guide, Second Edition

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Features

  • Addresses the technical, organizational, cultural, political, and human aspects of R/U-based processes
  • Describes two crucial measures, EVS and EVP, and clearly delineates and demonstrates how they are employed in individual-project and portfolio management
  • Considers the practical problems faced by decision-makers, including the estimation of the impact of new information, deciding the questions to ask to determine information quality, and determining the new techniques to integrate into a decision-making scheme
  • Summary

    Building upon the technical and organizational groundwork presented in the first edition, Risk Assessment and Decision Making in Business and Industry: A Practical Guide, Second Edition addresses the many aspects of risk/uncertainty (R/U) process implementation.

    This comprehensive volume covers four broad aspects of R/U: general concepts, implementation processes, technical aspects, and examples of application. Each section provides practical guidance, combining technical information with advice on how to implement R/U techniques and processes in real-world corporate environments. Following an examination of general principles involved in quantitatively assessing risks and their impact on value, the book describes the two main probabilistic measures of project value - Expected Value of Success (EVS) and the Expected Value for the Portfolio (EVP). The text clearly demonstrates how these metrics are used in individual-project and portfolio management.

    By presenting concepts in layman's terms and fully integrating advice related to technical and human characteristics of R/U-related corporate life, this book serves as a complete primer for professionals in any business environment.


    What's New in the Second Edition:

  • Provides guidance for implementation of R/U processes in modern corporations
  • Offers a crucial breakthrough by defining the terms "risk" and "uncertainty" in ways that can be applied in all aspects of science and business
  • Explores real-world impediments to process change and implementation
  • Addresses R/U from a corporate decision-maker's perspective, detailing how to employ R/U to set budgets, manage portfolios, value investments, and execute other critical tasks
  • Table of Contents

    INTRODUCTION
    What Companies Really Want to Do
    Practical Risk Assessment
    You Can Do It
    ABOUT RISK AND UNCERTAINTY
    Various Views on the Subject - Einstein Was Never Going to Get
    There
    Definitions of Risk and Uncertainty
    Two Values - The Expected Value of Success (EVS) and the Expected
    Value for the Portfolio (EVP)
    Risk Assessment and Risk Management
    What Questions Do I Ask and How Do I Integrate the Information?

    RISK ASSESSMENT: GENERAL CHARACTERISTICS AND
    BENEFITS
    Why Risk Assessment?
    Common Language
    Holistic Thinking
    Awareness
    Consider Range of Possibilities
    Establish Probabilities
    Communication with Customers and the Public
    Probabilistic Branching
    Relationships between Variables
    Linking of Disciplines
    Checklist - Do Not Take It for Granted
    Updating Estimates
    To What Types of Problems Can Risk Assessment Be Applied?

    RISK ASSESSMENT - A PROCESS
    Risk Assessment - The Process
    The Time It Takes to Do It Right, and When to Get Started
    What Is Typically Done
    What Is Not Typically Done
    What to Provide
    Size Does Not Matter (Not That I Was Worried about That)
    Stakeholders

    THE PERCEPTION FROM WITHIN - WHY THIS CAN BE
    SO DARN HARD TO IMPLEMENT
    Simple Resistance to Change and Momentum of Old Ways
    Learning How the Organization Really Works
    Practitioners Who Have Been Doing It for Years Are Difficult to
    Change - Newcomers Are Easier to Deal With
    Not Invented Here
    Instant Access to Executives - If You Are from Outside, You Are
    Smarter/Better
    Turf Wars
    Experts Who Are Not
    Management That Has Limited Appreciation and the Deterministic
    Mindset
    Coming from the Right Place
    Establishing Credibility So You Are Not Just Another Voice in the
    Wilderness
    Time for Preparation of the Organization - Who Benefits?
    Ramifications of Implementing a Probabilistic Risk System
    For This to Be Effective, Every Part of the Company Must Participate
    Not Just One Time - This Must Be Done Over and Over, Like a Diet

    CONSISTENCY - THE KEY TO A RISK PROCESS
    Biggest Bang from Assessing Multiple Opportunities
    Type Consensus Models
    Common Measure
    Risk Assessment Vision
    Sometimes Better to Be Consistent Than to Be Right
    Locking the Model
    Users Will Game the System - The Risk Police
    Databasing Inputs and Outputs
    Numbers That Reach Decision Makers
    Forums
    Language
    Risk as a Corporate Function

    COMMUNICATION
    Communication - Just One Shot
    Communication - Why Bother?
    Know Your Clients
    Focus on Impact and Mitigation
    Mitigation Is Not Enough
    Killing Projects
    Diplomatically Handle Winners and Losers
    Communicating the Value of Risk Assessment
    It Starts at the Top
    Create Success Story Presentation
    Web Stuff

    BUILDING A CONSENSUS MODEL
    What Is the Question? - Most of the Time and Effort
    Consensus Model
    Group Dynamics
    Write It Down
    Sort It Out
    Group Dynamics Again
    Units
    Overarching Categories
    No Such Thing as a Universal Model
    Difficult to Get People's Time to Go Through All This

    BUILD A CONTRIBUTING FACTOR DIAGRAM
    The Contributing Factor Diagram - Getting Started
    Identify and Define Variables
    Ask the Right Question
    Double-Dipping
    Double-Dipping and Counting the Chickens
    Fixing the Double-Dipping and Counting the Chickens Problems
    CFD-Building Example
    Short List of Hints for Building a CFD

    EDUCATION - CRITICAL AT THREE LEVELS
    Education for Management
    Introductory Class for Risk-Model Builders
    Advanced Training for Risk-Model Builders
    Organizational Attitude and Training Centers
    Time Demands and Organization of the Education Effort
    Difference between Education and Training

    RISK ASSESSMENT TECHNOLOGIES
    Different Approaches
    Discriminant Function Analysis
    Bayesian Analysis
    Decision Trees
    Factor Analysis
    Neural Nets
    The Risk Matrix
    Risk Registers

    MONTE CARLO ANALYSIS
    A Bit of History
    What Is It Good For?
    Simple Monte Carlo Example
    Buckets
    How Many Random Comparisons Are Enough?
    Output from Monte Carlo Analysis - The Frequency and Cumulative
    Frequency Plots
    Interpreting Cumulative Frequency Plots
    Combining Monte Carlo Output Curves

    DECISIONS AND DISTRIBUTIONS
    Decisions
    Just What Is a Distribution?
    Distributions - How to Approach Them
    Symmetrical Distributions
    Skewed Distributions
    Spiked Distributions
    Flat Distributions
    Truncated Distributions
    Discrete Distributions
    Bimodal Distributions
    Reading Data from a File
    Peakedness
    Triangular Distributions
    Specific Distribution Types
    Speaking Distributions
    Flexibility in the Decision-Making Process

    CHANCE OF FAILURE
    Chance of Failure - What Is It?
    Failure of a Risk Component
    Chance of Failure that Does Not Affect an Input Distribution
    Incorporating Chance of Failure in a Plot of Cumulative Frequency
    Another Reason for Chance of Failure
    The Inserting Zeroes Work-Around
    Chance of Failure and Multiple Output Variables
    A Clear Example of the Impact of Chance of Failure

    TIME-SERIES ANALYSIS AND DEPENDENCE
    Introduction to Time-Series Analysis and Dependence
    Time-Series Analysis - Why?
    Time-Series Analysis - How?
    Time-Series Analysis - Results
    Time-Series Analysis That Is Not
    Some Things to Consider
    Dependence - What Is It?
    Independent and Dependent Variables
    Degree of Dependence
    Multiple Dependencies and Circular Dependence
    Effect of Dependence on Monte Carlo Output
    Dependence - It Is Ubiquitous

    RISK-WEIGHTED VALUES AND SENSITIVITY ANALYSIS
    Introduction to Risk-Weighted Values and Sensitivity Analysis
    Risk-Weighted Values - Why?
    Risk-Weighted Values - How?
    The Net Risk-Weighted Value
    The Economic Risk-Weighted Resource (ERWR) Value
    The Expected Value of Success (EVS) and the Expected Value for the
    Portfolio (EVP)
    Risk-Weighted Values - The Answer
    Sensitivity Analysis - Why?
    Sensitivity Analysis - How?
    Sensitivity Analysis - Results

    WHAT COMPANIES REALLY WANT TO DO
    The Portfolio Effect - Sometimes You Just Do Not Get It
    Estimate Budgets
    Estimate Project Value - Two Types: The Expected Value of Success
    (EVS) and the Expected Value for the Portfolio (EVP)
    Ask the Right Questions to Determine the Quality of the Information
    Being Conveyed

    RISK ASSESSMENT EXAMPLES
    Introduction
    Qualitative Model
    Semi-Quantitative Model
    Mini Time-Series Model
    Fate-Transport (Process/Health) Model
    Decision-Tree Conversion
    Legal Model
    Comprehensive Risk Assessment Example
    EVS/EVP Example

    Editorial Reviews

    "[This book] presents an accessible treatment of the procedures and technologies involved in designing and building risk-assessment processes and models. … The entire volume is presented as a narrative, keeping statistical jargon to a minimum and explaining all concepts, techniques, and processes in a straightforward manner. … This new second edition … offers a crucial breakthrough by defining the terms 'risk' and 'uncertainty' in ways that can be applied in all aspects of science and business [and] explores real-world impediments to process change and implementation."
    - Continuity Insights

    "This revised edition is almost 40% larger than the first edition. Many of the original 14 chapters have been enhanced with a couple of significant new sections…Statisticians who are involved with risk analysis will find this book always useful, unabashedly practical, continually amusing with its informal and folksy (even irreverent) conversational writing style…Their nonstatistical colleagues on uncertainty evaluation projects will very likely love the book and will certainly benefit from at least some of the many nuggets of information on how to have their risk projects end up as successful projects."
    -Technometrics, Vol. 47, No. 3, August 2005

    Comments on the first edition:

    "To describe [Koller's] approach to risk management as pragmatic is understatement…He patiently walks you through what risk management is, how it works, and why so many organizations benefit from it. He introduces only the necessary amount of statistical building-blocks to help the logic build and is almost apologetic about the occasional reference to statistics or math. Along the way, it becomes obvious that he has guided you by the hand from one learning point to another with such subtlety that you arrive at the end of the book in about half the time you envisioned…

    But the most interesting aspect of Koller's approach is his emphasis on interpersonal impacts of risk management and the importance of designing processes with an eye toward organizational dynamics…this book is worth reading because its focus is the bottom line and it doesn't get lost on the journey. You won't either."

    -Marketing NPV

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