Project risk, expected value and response choices
This chapter develops the seven risk processes and the vocabulary that separates risk from issue, threat from opportunity, and contingency reserve from management reserve. Quantitative items typically use expected monetary value or a small decision tree.
Identify and analyse
- A risk is an uncertain event that, if it occurs, affects objectives; it has a cause, an event, and an impact. An issue has already happened.
- Identification tools: brainstorming, Delphi (anonymous, multi-round, converging), interviews, root-cause analysis, SWOT, checklists, assumption analysis, document review.
- Qualitative analysis: probability-impact matrix, risk categorisation via a risk breakdown structure, data-quality assessment, urgency.
- Quantitative analysis: expected monetary value, decision trees, Monte Carlo simulation, sensitivity analysis displayed as a tornado chart.
Respond and monitor
- Threat responses: escalate, avoid, transfer, mitigate, accept. Opportunity responses: exploit, share, enhance, accept.
- Transferring risk, for example by insurance or fixed-price outsourcing, shifts financial responsibility but does not eliminate the risk.
- Contingency reserve covers known-unknowns; management reserve covers unknown-unknowns.
- Monitoring uses risk audits, reserve analysis, technical performance analysis, and risk reassessment. A workaround is an unplanned response to an emerged risk; a corrective action fixes an existing deviation.
Worked example
Option A: invest 100万元, with a 70% chance of earning 300万元 and a 30% chance of earning 50万元. EMV = 0.7 × 300 + 0.3 × 50 − 100 = 210 + 15 − 100 = 125万元. Option B: invest 60万元, with a 90% chance of 150万元 and a 10% chance of zero. EMV = 135 − 60 = 75万元. Choose A on EMV, while noting that A’s minimum modeled net outcome is−50万元 and B’s is−60万元. Expected value and worst-case outcome answer different questions, and these are supplied hypothetical payoffs.
Traps that cost marks
- Saying transfer eliminates risk.
- Using management reserve for an identified, assessed risk.
- Labelling an already-occurred problem as a risk.
- Treating acceptance as always passive; active acceptance can include contingency resources and a planned response rather than simply ignoring the risk.
- Forgetting that EMV is a statistical average, not a guarantee.