Tools and Techniques for Risk Quantification

1.Expected monetary value. Expected monetary value, as a tool for risk quantification, is the product of two numbers:
• Risk event probability–an estimate of the probability that a given risk event will occur.
• Risk event value–an estimate of the gain or loss that will be incurred if the risk event does occur.

The risk event value must reflect both tangibles and intangibles. For example, Project A and Project B both identify an equal probability of a tangible loss of $100,000 as an outcome of an aggressively priced proposal. If Project A predicts little or no intangible effect, while Project B predicts that such a loss will put its performing organization out of business, the two risks are not equivalent.
In similar fashion, failure to include intangibles in this calculation can severely distort the result by equating a small loss with a high probability to a large loss with a small probability. The expected monetary value is generally used as input to further analysis (e.g., in a decision tree) since risk events can occur individually or in groups, in parallel or in sequence.

2. Statistical sums. Statistical sums can be used to calculate a range of total project costs from the cost estimates for individual work items. The range of total project costs can be used to quantify the relative risk of alternative project budgets or proposal prices.

3 Simulation. Simulation uses a representation or model of a system to analyse the behaviour or performance of the system. The most common form of simulation on a project is schedule simulation using the project network as the model of the project. Most schedule simulations are based on some form of Monte Carlo analysis. This technique, adapted from general management, “performs” the project many times to provide a statistical distribution of the calculated results.

The results of a schedule simulation may be used to quantify the risk of various schedule alternatives, different project strategies, different paths through the network, or individual activities. schedule simulation should be used on any large or complex project since traditional mathematical analysis techniques such as the Critical Path Method (CPM) and the Program Evaluation and Review Technique (PERT) do not account for path convergence and thus tend to underestimate project durations. Monte Carlo analysis and other forms of simulation can also be used to assess the range of possible cost outcomes.

4 Decision trees. A decision tree is a diagram that depicts key interactions among decisions and associated chance events as they are understood by the decision maker. The branches of the tree represent either decisions (shown as boxes) or chance events (shown as circles).

5 Expert judgment. Expert judgement can often be applied in lieu of or in addition to the mathematical techniques described above. For example, risk events could be described as having a high, medium, or low probability of occurrence and a severe, moderate, or limited impact

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