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

by Koller; Glenn R.

• ISBN13: 9781584884774
• ISBN10: 1584884770
• Edition: 2nd
• Format: Hardcover
• Copyright: 2005-03-30
• Publisher: Chapman & Hall/

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

About the Author	xiii
Preface	xv
Acknowledgments	xvii
Introduction	xix
What Companies Really Want to Do	xix
Practical Risk Assessment	xxi
You Can Do It	xxiii
Chapter 1 About Risk and Uncertainty	1	(12)
Various Views on the Subject - Einstein Was Never Going to Get There	1	(2)
Definitions of Risk and Uncertainty	3	(5)
Two Values - The Expected Value of Success (EVS) and the Expected Value for the Portfolio (EVP)	8	(1)
Risk Assessment and Risk Management	9	(1)
What Questions Do I Ask and How Do I Integrate the Information?	10	(3)
Chapter 2 Risk Assessment: General Characteristics and Benefits	13	(14)
Why Risk Assessment?	13	(1)
Common Language	14	(2)
Holistic Thinking	16	(1)
Awareness	17	(1)
Consider Range of Possibilities	18	(1)
Establish Probabilities	18	(1)
Communication with Customers and the Public	19	(1)
Probabilistic Branching	20	(1)
Relationships between Variables	21	(1)
Linking of Disciplines	21	(2)
Checklist - Do Not Take It for Granted	23	(1)
Updating Estimates	24	(1)
To What Types of Problems Can Risk Assessment Be Applied?	25	(2)
Legal Model	25	(1)
Environmental Health and Safety Model	25	(1)
Pipeline Route Selection Model	25	(1)
Political Models	25	(1)
Capital Project Ranking and Portfolio Management Model	26	(1)
New Products Model	26	(1)
Fate/Transport Model	26	(1)
Chapter 3 Risk Assessment - A Process	27	(14)
Risk Assessment - The Process	27	(2)
The Time It Takes to Do It Right, and When to Get Started	29	(1)
What Is Typically Done	30	(2)
What Is Not Typically Done	32	(1)
What to Provide	33	(4)
Size Does Not Matter (Not That I Was Worried about That)	37	(1)
Stakeholders	38	(3)
Chapter 4 The Perception from Within - Why This Can Be So Darn Hard to Implement	41	(24)
Simple Resistence to Change and Momentum of Old Ways	41	(3)
If They Do Not Have a System, Find Out Why	41	(1)
Wisely Select Your Entry Point	42	(1)
Make a Strong Business Case	42	(1)
If They Have a System, They Are Proud of It	43	(1)
Have Upper-Level Support	43	(1)
Provide Help	44	(1)
Expect Initial Rebuff	44	(1)
Learning How the Organization Really Works	44	(3)
Practitioners Who Have Been Doing It for Years Are Difficult to Change - Newcomers Are Easier to Deal With	47	(1)
Not Invented Here	48	(1)
Instant Access to Executives - If You Are from Outside, You Are Smarter/Better	48	(1)
Turf Wars	49	(1)
Experts Who Are Not	50	(1)
Management That Has Limited Appreciation and the Deterministic Mindset	51	(2)
Coming from the Right Place	53	(1)
Establishing Credibility So You Are Not Just Another Voice in the Wilderness	54	(3)
Time for Preparation of the Organization - Who Benefits?	57	(1)
Ramifications of Implementing a Probabilistic Risk System	58	(4)
The Reward System	58	(1)
Cannot Easily Overlay the New Process on the Existing Business Model	59	(2)
Two Sets of Books	61	(1)
For This to Be Effective, Every Part of the Company Must Participate	62	(1)
Not Just One Time - This Must Be Done Over and Over, Like a Diet	63	(2)
Chapter 5 Consistency - The Key to a Risk Process	65	(18)
Biggest Bang from Assessing Multiple Opportunities	65	(1)
Type Consensus Models	66	(3)
Common Measure	69	(1)
Risk Assessment Vision	70	(2)
Sometimes Better to Be Consistent Than to Be Right	72	(2)
Locking the Model	74	(1)
Users Will Game the System - The Risk Police	75	(2)
Databasing Inputs and Outputs	77	(1)
Numbers That Reach Decision Makers	78	(2)
Forums	80	(1)
Language	81	(1)
Risk as a Corporate Function	81	(2)
Chapter 6 Communication	83	(14)
Communication - Just One Shot	83	(1)
Communication - Why Bother?	83	(1)
Know Your Clients	84	(1)
Focus on Impact and Mitigation	85	(1)
Mitigation Is Not Enough	85	(3)
Killing Projects	88	(1)
Diplomatically Handle Winners and Losers	89	(1)
Communicating the Value of Risk Assessment	90	(2)
It Starts at the Top	92	(1)
Create Success Story Presentation	93	(1)
Web Stuff	94	(3)
Chapter 7 Building a Consensus Model	97	(12)
What Is the Question? - Most of the Time and Effort	97	(1)
Consensus Model	98	(2)
Group Dynamics	100	(1)
Write It Down	100	(2)
Sort It Out	102	(1)
Group Dynamics Again	103	(1)
Units	103	(1)
Overarching Categories	104	(1)
No Such Thing as a Universal Model	105	(1)
Difficult to Get People's Time to Go Through All This	106	(3)
Chapter 8 Build a Contributing Factor Diagram	109	(16)
The Contributing Factor Diagram - Getting Started	109	(4)
Identify and Define Variables	113	(1)
Ask the Right Question	114	(1)
Double-Dipping	115	(1)
Double-Dipping and Counting the Chickens	116	(1)
Fixing the Double-Dipping and Counting the Chickens Problems	116	(2)
CFD-Building Example	118	(4)
Short List of Hints for Building a CFD	122	(3)
Chapter 9 Education - Critical at Three Levels	125	(12)
Education for Management	125	(2)
Introductory Class for Risk-Model Builders	127	(1)
Advanced Training for Risk-Model Builders	128	(1)
Organizational Attitude and Training Centers	129	(1)
Time Demands and Organization of the Education Effort	130	(3)
Difference between Education and Training	133	(4)
Chapter 10 Risk Assessment Technologies	137	(20)
Different Approaches	137	(1)
Discriminant Function Analysis	137	(1)
Bayesian Analysis	138	(3)
Decision Trees	141	(6)
Factor Analysis	147	(2)
Neural Nets	149	(2)
The Risk Matrix	151	(2)
Risk Registers	153	(4)
Chapter 11 Monte Carlo Analysis	157	(14)
A Bit of History	157	(1)
What Is It Good For?	157	(2)
Simple Monte Carlo Example	159	(1)
Buckets	159	(2)
How Many Random Comparisons Are Enough?	161	(1)
Output from Monte Carlo Analysis - The Frequency and Cumulative Frequency Plots	162	(3)
Interpreting Cumulative Frequency Plots	165	(4)
Combining Monte Carlo Output Curves	169	(2)
Chapter 12 Decisions and Distributions	171	(26)
Decisions	171	(1)
Just What Is a Distribution?	171	(4)
Distributions - How to Approach Them	175	(2)
Symmetrical Distributions	177	(2)
Skewed Distributions	179	(1)
Spiked Distributions	180	(1)
Flat Distributions	180	(1)
Truncated Distributions	181	(2)
Discrete Distributions	183	(1)
Bimodal Distributions	184	(1)
Reading Data from a File	185	(2)
Peakedness	187	(1)
Triangular Distributions	188	(1)
Specific Distribution Types	189	(1)
Speaking Distributions	190	(4)
Flexibility in the Decision-Making Process	194	(3)
Chapter 13 Chance of Failure	197	(16)
Chance of Failure - What Is It?	197	(1)
Failure of a Risk Component	198	(2)
Chance of Failure that Does Not Affect an Input Distribution	200	(1)
Incorporating Chance of Failure in a Plot of Cumulative Frequency	201	(2)
Another Reason for Chance of Failure	203	(2)
The Inserting Zeroes Work-Around	205	(2)
Chance of Failure and Multiple Output Variables	207	(1)
A Clear Example of the Impact of Chance of Failure	207	(6)
Chapter 14 Time-Series Analysis and Dependence	213	(16)
Introduction to Time-Series Analysis and Dependence	213	(1)
Time-Series Analysis - Why?	213	(1)
Time-Series Analyisis How?	213	(2)
Time-Series Analysis - Results	215	(2)
Time-Series Analysis That Is Not	217	(1)
Some Things to Consider	217	(2)
Dependence - What Is It?	219	(1)
Independent and Dependent Variables	219	(1)
Degree of Dependence	220	(4)
Multiple Dependencies and Circular Dependence	224	(1)
Effect of Dependence on Monte Carlo Output	224	(2)
Dependence - It Is Ubiquitous	226	(3)
Chapter 15 Risk-Weighted Values and Sensitivity Analysis	229	(16)
Introduction to Risk-Weighted Values and Sensitivity Analysis	229	(1)
Risk-Weighted Values - Why?	229	(3)
Risk-Weighted Values - How?	232	(1)
The Net Risk-Weighted Value	233	(1)
The Economic Risk-Weighted Resource (ERWR) Value	234	(2)
The Expected Value of Success (EVS) and the Expected Value for the Portfolio (EVP)	236	(2)
Risk-Weighted Values The Answer	238	(1)
Sensitivity Analysis Why?	238	(2)
Sensitivity Analysis How?	240	(3)
Sensitivity Analysis - Results	243	(2)
Chapter 16 What Companies Really Want to Do	245	(14)
The Portfolio Effect Sometimes You Just Do Not Get It	245	(3)
Estimate Budgets	248	(4)
Estimate Project Value - Two Types: The Expected Value of Success (EVS) and the Expected Value for the Portfolio (EVP)	252	(1)
Ask the Right Questions to Determine the Quality of the Information Being Conveyed	253	(6)
How Does This New Information Impact the Decision or the Decision-Making Process?	254	(1)
What Assurance Do I Have That the Process That Generated This New Information Is Practical and Credible?	255	(1)
How Can This New Information Be Integrated Into the Existing Decision-Making Process?	256	(3)
Chapter 17 Risk Assessment Examples	259	(58)
Introduction	259	(1)
Qualitative Model	259	(2)
Semi-Quantitative Model	261	(3)
Mini Time-Series Model	264	(6)
Fate-Transport (Process/Health) Model	270	(4)
Decision-Tree Conversion	274	(4)
Legal Model	278	(7)
Comprehensive Risk Assessment Example	285	(23)
EVS/EVP Example	308	(9)
The Corporate View	308	(4)
The Business-Unit-Leader View	312	(5)
Index	317