Lecture 12: Risk Management

Question 1

Whats a risk?

Answer 1

• …is the deviation of a result of a future event from expectations
• … is uncertain whether it will materialize or not
• …is a potential harm that may arise of such an event
• …might accrue a the failure to attain some benefit
• … depends on our decisions

Question 2

Risk Lineup

Answer 2

• Fate (traditional societies; future is pre- determined by god)
  
  • Risk (modern societies, protestant reformation;; socially produced;; probability;; responsibility)
• Uncertainty (unmeasurable; “the unknown unknowns”; black swan)
  
  • Risk (measurable and controlleable – but “shit happens”)
• Danger (is ‘always’ there)
  
  • Risk (human action transforms danger into risk)

Question 3

Risk, Uncertainty and Profit

Answer 3

• Solutions:
  
  • Logical (throw dice) - Risk
  • Empirical (statistical analysis) - Risk
  • Subjective (human beliefs) - True Uncertainty

Question 4

The General Theory of Employment

Answer 4

• “Radical uncertainty”: knowledge about future is fluctuating, vague and essentially uncertain
• Probabilities hardly possible to calculate

Question 5

Topics of Recent Discussions about Risk & Uncertainty

Answer 5

• no clear separation between risk and uncertainty, but rather different risk levels depending on degree of frequency, predictability and familiarity (Krahmann, 2011)
• Simple versus systemic (higher uncertainty, complexity and ambiguity, broader areas of society affected,) risks (van Asselt, Renn 2011)
• Impact of norms, values, status, cultures and socio-politics on risk perception (Slovic 2010, The Psychology of Risk)
• Wrong reliance on mathematical risk models; importance of values and norms; illusion of
  control (Katzenstein/Nelson 2010, Uncertainty and Risk and the Crisis of 2008)
• Olsen 2008, Perceptions of Financial Risk: emotions, fear and groupthink drive risk perception

Question 6

5 Risk Management Perspectives

Answer 6

• Morpology
• Attitude
• Methods
• Skills
• Development

Question 7

1. Risk Management Morphologies

Answer 7

Morphology = study of forms, artifacts, structures

1. What is the nature of risk ?
2. What is the nature of management ?

• Strategy (high level plan to achive a goal)
• Planning (action sequence in the future)
• Organisation (institution with collective goal)
• Leadership (social influence to reach a goal)
• Control (actions to correct deviations from expectations)
• Management = management of contradictions
• high degrees of ambiguity
• Handling of trade-offs, dilemmas, paradox

Question 8

2. Risk Management Methods

Answer 8

Methodological = application of models; systematic; theoretical; paradigm; phases; techniques

Risk Management Framework

Question 9

Identify Risks

Answer 9

• What might affect project objectives?
• Internal or external scources?
• Performed by project management AND team
• Methods: brainstorming, checklists, expert discussions, SWOT analysis (strengths, weaknesses, opportunities, threats)
• Group risks into categories (eg complexity, technology, ressources, quality, requirements, planning, communication & change management)
• Assign risk triggers

Question 10

Project Risks

Answer 10

Question 11

Risk Assessment Matrix

Answer 11

Question 12

Risk Mitigation

Answer 12

Mitigations can be grouped into 4 possible response types

• Avoidance-based
  
  • Try to avoid risk occurence
  • Mostly used at planning phase
• Control-based
  
  • Identify actions to control risk occurence and impact
  • Most common response
• Transfer-based
  
  • Delegate risk, for example to sub-contractors
• Investigation-based
  
  • ​Try to analyze risk further
  • Risk is not reduced

Question 13

Risk Mitigation Plan

Answer 13

• Periodic risk assessment
• Possible escalation to program

ID / RISK / STATUS / PROB IMPACT INC DEC

Question 14

3. Risk Management Attitudes

Answer 14

It‘s the attitude that determines your altitude!

Accept the uncertain

“Certainty? In this world nothing is certain but death and taxes.” _{Benjamin Franklin, statesman, 1706 - 1790}

“Maturity, one discovers, has everything to do with the acceptance of ‘not knowing.” _{Mark Z. Danielewski, US writer, * 1966}

Explore the uncertain

“To learn which questions are unanswerable, and not to answer them: this skill is most needful in times of stress and darkness.” _{Ursula K. Le Guin, writer, * 1929}

“Let go of certainty. The opposite isn’t uncertainty. It’s openness, curiosity and a willingness to embrace paradox, rather than choose up sides. The ultimate challenge is to accept ourselves exactly as we are, but never stop trying to learn and grow.” _{Tony Schwartz, CEO of the Energy Project}

See things from different angles

“Certainty has its limitations. Very rarely, I’ve discovered, is certainty the outgrowth of careful consideration and deep understanding. Far more often, it’s a primitive instinct — a way we defend against uncertainty, which understandably feels unsettling and even dangerous.” _{Tony Schwartz, CEO of the Energy Project ​}

Question 15

3. Risk Management Attitudes / Reactions to uncertainty

Answer 15

• Scenario analyses
• Stress tests
• Mix of quantitative (model) and qualitative (expert) views
• Retroactive testing: challenge expert view with statistics; mark uncertainties / model weaknesses (Aven/Renn 2009: Role of Quantitative Risk Assessments …)
• Self-referentiality of probability models; “wild randomness” (Makridakis/Taleb 2009)

Question 16

4. Risk Management Skills

Answer 16

• Rules
  
  • Update risk log
  • Establish contingency plan
• Know- ledge
  
  • Specific IT arch knowledge
  • Business / functional know-how
• Distance
  
  • Challenge time & cost estimates
  • Listen to different opinions
• Intuition
  
  • Expert estimations
  • Feeling about risks / problems

Question 17

Rules

Answer 17

• Pros:
  
  • transparent
  • reproducible
  • simple
  • communication
  • quick
• Cons:
  
  • diffuse situation / information
  • generic
  • Conservative
  • Learning ?

Question 18

Knowledge

Answer 18

• Pros
  
  • differentiated
  • situative
  • faciliates perception, learning, understanding
• Cons
  
  • slow
  • often unclear results
  • Intransparent
  • expert traps (requires „distance“)
  • missing focus

Question 19

Intuition

Answer 19

• Pros
  
  • quick
  • low „mind conflicts“
  • leverages on past experiences
• Cons
  
  • requires a lot of experiences, reflection and a long track record of similar situations
  • intransparent / not communicative
  • brain = lazy !
  • Not reproducible

Question 20

Decision Making: 6 Colour Model

Answer 20

Question 21

Risk Management Development

Answer 21

Question 22

Is intuition a key element of advanced risk management skills?

Select one or more:

a. Yes, because it is easier and more convenient to rely on gut feel.
b. Yes, because some situations cannot be solved analytically due to complexity and required decision speed.
c. No, because sophisticated rules are sufficient and provide reliable guidance.

Answer 22

b

Question 23

Why has the concept of risk become under increased scrutiny (again) recently?

Select one or more:

a. Because we should develop more sophisticated risk models, leveraging also on technology.
b. Because many risk models have failed during the financial crisis in 2008.
c. Risk is a rational concept - however, reality can often not adequately represented by models.

Answer 23

b,c

Question 24

Your project sponsor asks for a significantly more aggressive timeline for delivery. What do you do?

Select one or more:

a. You answer “we try” and then ask the project team to accelerate the delivery.
b. You tell him, that his request needs to be assessed in more detail - but it might have an impact on other parameters.
c. You apologize and refer to the agreed project plan, signed-off by the steering committee.

Answer 24

b

Question 25

What kind of risk mitigation types exist?

Select one or more:

a. Try to transfer risks
b. Try to control risks
c. Better investigate risks
d. Try to avoid risks

Answer 25

a,b,c,d