Advanced Project Management
Project Risk Management
Ghazala Amin
Project Risk Management
• Reference study materials
– A guide to the Project Management Body of
Knowledge (PMBOK Guide), Chapter 11
– Study notes
– Dr. Kerzner’s book, Chapter 17
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Project Risk Management
• What to Study
– Risks – with various qualifiers
– The three components of risk: Risk Event,
Probability of Risk Event and Impact of Risk
– Probability-Impact Matrix
– Risk assessment using decision trees and
expected monetary values
– The relationship of risk and the project life cycle
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Project Risk Management
• Key Definitions
– Certainty, Risk, Uncertainty
– Business Risk, Insurable(Pure) Risk
– Technical Risks, Project Management Risks,
Organizational Risks, External Risks, Internal
Risks,, Legal Risks
– Known Risks, Unknown Risks
– Expected Monetary Value (EMV)
– Trigger (a.k.a Risk symptom or Warning sign)
– Contingency Plan, Fallback Plan
– Contingency Reserve, Management Reserve
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What is a risk?
A risk is a potential event or a future situation that may negatively
affect the project.
Risks are identified, described and analyzed in terms of;
Probability that they will occur
Effects or consequences if they do happen
Time frame within which their consequences might occur
Examples of few risks to the project;
Technology not easily available
Resources not committed to the project
Sponsor does not show up for meetings
Unidentified end users etc. etc.
›Source/Reference: IBM Learning Centre for development of PM Curriculum
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Project Risk Management
• Risk Management is the systematic process
of identifying, analyzing, and responding to
project risk
• It is continuous process of identifying,
analyzing, and planning for risks.
• It is the most effective means of preventing
and/or minimizing exposure to your project.
Risks associated with project integration are usually the smallest during the project’s
initiation and charter approval phase of the project life cycle.
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Project Risk Management
• Risk Management process include:
– Formal planning activity,
– Analysis to quantify the likelihood and
predict impact on the project,
– Handling strategy for selected risks,
– Ability to monitor progress in reducing
these risk to the level to minimize impact
on the project.
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Project Risk Management
• Project Risk Management Processes
(PMBOK)
– Plan Risk Management
– Risk Identification
– Qualitative Risk Analysis
– Quantitative Risk Analysis
– Risk Response Planning
– Risk Monitoring and Control
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Project Risk Management Processes (PMBOK)
Process Groups Initiation
Planning
Execution
Control
Closing
Knowledge
Areas
Risk
Management
Risk Management
Planning
Risk
Monitoring
and Control
Risk Identification
Qualitative Risk
analysis
Quantitative Risk
analysis
Risk Response
Planning
Project Risk Management is the process of being proactive rather than
reactive.
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Risk Preference and Utility Theory
• “Utility” which can be defined as the amount of
satisfaction or pleasure that the project manager
receives from a payoff (This is also called project
manager’s tolerance for risk).
– PM must use expert judgment and tools to deal with risks.
– The ultimate decision on how the PM deals with risk is
based on his/her own tolerance for risk.
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Types of Risk Takers
• Risk Averter (Risk Avoider)
– Utility rises at the decreasing rate
– When more money is at stake, project
manager’s satisfaction or tolerance
decreases
– Prefers certain outcome and demand
premium to accept risks.
11
Types of Risk Takers
• Risk Neutral
– The slope of utility curve is constant
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Types of Risk Takers
• Risk Seeker (Risk Lover)
– The utility rises at the increasing rate
– The project manager’s satisfaction
increases when more money is at
stake
– Prefers uncertain outcome and
willing to pay penalty to take risks
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Risk - Definitions
• Decision making falls into the following categories:
• Certainty
– All information for making the right decision is available
– Can predict the outcome with confidence
• Risk
– The totality of the occurrence can be described within
established confidence limit
– Expected payoff can be mathematically calculated
• Uncertainty
– Meaningful assignments of probabilities are not possible
– Management decision can be made applying one of 4
criteria
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Decision Making Under Risk: Expected Value
Expected value is the product of two numbers:
• Risk Event Probability (states of nature)
– An estimate of the probability that a given risk
event will occur.
• Risk Event Value (Payoff for strategies)
– An estimate of the gain or loss that will be
incurred if the risk event does occur.
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Decision Making Under Risk: Expected Value
• Expected monetary value
Mathematically:
N
E i = Σ Pij pj,
Where
j=1
E i = expected payoff for strategy i
P = Payoff element
p = Probability of event
E 1 = (50)(0.25)+40(0.25)+90(0.5) = 67.50
E 2 = (50)(0.25)+50(0.25)+60(0.5) = 55
E 3 = (100)(0.25)+80(0.25)+(-50)(0.5) = 20
Based on the Expected payoff value, Strategy 1 should be used.
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Decision Making Under
Uncertainty
• Hurwicz Criterion (Maximax)
– The decision maker is always optimistic and attempts to
maximize profits by a go-for-broke strategy
• Wald Criterion (Maximin)
– The decision maker is concerned with how much he/she
can afford to lose. In this criteria, a pessimistic approach
is taken
• Savage Criterion (Minimax)
– The project manager attempts to minimize the maximum
regrets
• Laplace Criterion
– Transforms decision making under uncertainty into
decision making under risk
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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 makers
• The branches of the tree represent either
decisions (shown as boxes) or chance events
(shown as circles)
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Decision Tree - Example
• A product can be manufactured using Machine A or
Machine B
• Machine A has a 40% chance of being used and
Machine B has a 60% chance of being used
• When Machine A is selected, Process C is selected
80% of the time and Process D 20% of the time
• When Machine B is selected, Process C is selected
30% of the time and Process D 70% of the time
• What is the probability of being produced by the
various combinations?
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Decision Tree - Example
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Decision Tree - Example
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