AACE DRMP flashcards

32 cards. Read the term and the definition here. The deck at the top of this page is optional.

Expected Monetary Value

EMV is the probability-weighted sum of all possible outcomes of an uncertain event. Compare alternatives by choosing the highest EMV when the decision-maker is risk-neutral.

Decision tree node shapes

In a decision tree, squares mark decision nodes where the team chooses among alternatives; circles mark chance nodes where probabilities apply; terminal branches carry payoff values.

Expected Value of Perfect Information

EVPI equals the expected value with perfect information minus the expected value of the best alternative without it. It is the maximum amount worth paying to remove uncertainty.

Expected Value of Sample Information

EVSI equals the expected value with imperfect test or survey information minus the expected value without it. Information should be gathered only when its cost is below EVSI.

Risk-averse utility curve

A concave utility function in which each additional unit of money adds less utility. The decision-maker prefers a certain sum to a gamble of equal expected value.

Certainty equivalent

The guaranteed amount that a decision-maker values equally to a risky gamble. The risk premium equals the gamble's EMV minus this certainty equivalent.

Sunk cost rule

Money already spent cannot be recovered and must be excluded from a decision. Only incremental future costs and benefits of each alternative belong in the comparison.

Framing bias

Choices shift depending on whether outcomes are described as gains or as losses. Losses usually loom larger, so the same alternative can look attractive or unattractive purely from presentation.

Anchoring bias

Over-reliance on an initial number, such as a first estimate or a prior bid, when making later judgments. Subsequent estimates stay too close to the anchor even when it is arbitrary.

Analytic Hierarchy Process

A multi-criteria method that compares criteria and alternatives in pairs on a 1-to-9 ratio scale, derives weights from the comparison matrix, and ranks alternatives by weighted score.

Consistency ratio threshold

The consistency ratio measures how far a pairwise comparison matrix departs from perfect consistency. A value of 0.10 or less is generally accepted; higher values require revised judgments.

One-at-a-time sensitivity analysis

Vary one input while holding the others at base case to see whether the preferred alternative changes. The break-even value marks the point where the decision reverses.

Tornado diagram

A horizontal bar chart ranking uncertain variables by how much the outcome swings between their low and high values. The widest bar identifies the most influential driver.

Decision tree rollback

The fold-back procedure solves a tree from right to left: each chance node is replaced by its EMV and each decision node by its best branch, until the root value is obtained.

Dominated alternative

An option that performs no better than another on every criterion and is worse on at least one. It can be eliminated before scoring, saving effort and simplifying the choice.

Weighted scoring model

Normalize each alternative's score to a common scale, multiply by criterion weights that sum to 1.0, and add. The highest total identifies the preferred alternative in multi-criteria decisions.

Risk register

A living log of identified risks recording ID, cause, event, potential effect, probability, impact, score, owner, planned response, and residual rating. It is reviewed and updated throughout the project.

Risk breakdown structure

A hierarchical grouping of risk sources such as technical, external, organizational, and project management categories. It supports systematic identification and shows where exposure concentrates.

Probability-impact matrix

A grid plotting likelihood against impact using defined scales, usually five by five. Each cell yields a risk score that ranks threats for response priority.

Risk appetite

The amount of risk an organization is willing to accept in pursuit of its objectives, stated as a broad directional preference rather than a precise numeric limit.

Risk tolerance

The practical range of deviation from objectives that an organization can absorb within a given risk category. It translates broad appetite into measurable limits for specific project areas.

Risk threshold

A specific quantitative limit at which a risk becomes unacceptable and a response must be triggered. Thresholds sit inside tolerance bands and are written into project plans.

Threat response: avoid

Change the plan to eliminate the threat entirely, for example by dropping a scope element, using proven technology, or relocating a facility. Avoidance removes both the risk and its potential gain.

Threat response: transfer

Shift the financial consequence of a threat to a third party through insurance, bonds, warranties, or fixed-price contracts. The risk event can still occur; ownership of the impact moves.

Threat response: mitigate

Reduce the probability or impact of a threat to an acceptable level, for instance through prototyping, added inspections, or extra stock. Residual risk remains and must be tracked.

Threat response: accept

Acknowledge the risk and take no action beyond monitoring, appropriate when exposure is below tolerance or response cost exceeds benefit. Active acceptance sets aside a contingency reserve.

Contingency reserve

Budget or time set aside for identified risks that have been accepted or mitigated. It sits inside the cost or schedule baseline and is managed by the project manager.

Management reserve

Funds held outside the baseline for unidentified risks and unforeseen scope changes. Release usually requires sponsor or management approval because it changes the authorized baseline.

Residual risk

The exposure that remains after a response has been implemented. It must be assessed and recorded, because some risk usually persists even after strong mitigation.

Secondary risk

A new risk created by the response itself, such as a fixed-price contract that pushes a supplier toward quality shortcuts. Secondary risks are analyzed like any other risk.

PERT three-point estimate

Expected value equals optimistic plus four times most likely plus pessimistic, all divided by six. Standard deviation equals pessimistic minus optimistic, divided by six.

Monte Carlo simulation

Iteratively samples probability distributions for cost or schedule elements to produce a distribution of total outcomes. Outputs include confidence levels, contingency for a target probability, and sensitivity rankings.