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    Week 3 Part1 - Risk Uncertainty

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    Kainat Tariq
    This document provides an introduction to risk management and uncertainty. It discusses how probability can help reduce uncertainty about predictable future events but is less useful for rare and unexpected events. It also examines how experts are generally no better than non-experts at forecasting outcomes, though experts tend to have more confidence in their predictions. The document emphasizes that while forecasts help provide a sense of what may happen, uncertainty cannot be avoided and is something organizations must manage alongside risks.

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    Week 3 Part1 - Risk Uncertainty

    Uploaded by

    Kainat Tariq
    10 views27 pages
    This document provides an introduction to risk management and uncertainty. It discusses how probability can help reduce uncertainty about predictable future events but is less useful for rare and unexpected events. It also examines how experts are generally no better than non-experts at forecasting outcomes, though experts tend to have more confidence in their predictions. The document emphasizes that while forecasts help provide a sense of what may happen, uncertainty cannot be avoided and is something organizations must manage alongside risks.

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    This document provides an introduction to risk management and uncertainty. It discusses how probability can help reduce uncertainty about predictable future events but is less useful for rare and unexpected events. It also examines how experts are generally no better than non-experts at forecasting outcomes, though experts tend to have more confidence in their predictions. The document emphasizes that while forecasts help provide a sense of what may happen, uncertainty cannot be avoided and is something organizations must manage alongside risks.

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    10 views27 pages

    Week 3 Part1 - Risk Uncertainty

    Uploaded by

    Kainat Tariq
    This document provides an introduction to risk management and uncertainty. It discusses how probability can help reduce uncertainty about predictable future events but is less useful for rare and unexpected events. It also examines how experts are generally no better than non-experts at forecasting outcomes, though experts tend to have more confidence in their predictions. The document emphasizes that while forecasts help provide a sense of what may happen, uncertainty cannot be avoided and is something organizations must manage alongside risks.

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    of 27

    1.

    2 Project risk Management

    Risk Management
    Risk & Uncertainty

    All knowledge degenerates into probability.

    David Hume(1711–1776),
    Scottish Philosopher
    2

    Learning Objectives
    • Upon completion, you should be able to:
    – Explain how personality and cultural influences
    affect
    our attitudes and behaviour with regard to risk.
    – Identify the 4 main risk personality types and their
    distinguishing characteristics.
    – Distinguish between what is controllable and what
    is
    the preserve of chance.
    Risk & Uncertainty
    • We will conclude this introduction by exploring
    the meaning of uncertainty.
    • We saw previously, that risk can be described
    as: the combination of the probability of an
    event and its consequences.
    • We therefore need to be clear about the
    meaning of probability.
    Uncertainty
    • Uncertainty is the deviation of one or more
    results of one or more future events from their
    expected value.
    • The lack of certainty, a state of having limited
    knowledge where it is impossible to exactly
    describe existing state or future outcome, more
    than one possible outcome.
    • At any point in time, we can summarise our
    state of knowledge and uncertainty according
    to the following table:
    Four Quadrants Model of Knowledge

    Knowledge Risks
    (known knowns) (known unknowns)
    Predictable future states Possible states identified
    Ambiguous outcomes
    Project data
    Quantifiable variables
    Independently verifiable Know contingency actions
    evidence

    Untapped Uncertainty
    Knowledge (unknown unknowns)
    Hidden knowledge
    (unknown knowns) Unknown relationships between
    Researchable facts key variables
    Unshared skills and Unpredictable events
    information ‘Bolts from the blue’
    Untapped resources
    Knowledge and the Future

    • We are particularly interested in our


    knowledge and uncertainty about future
    events.
    • Some future events are very predictable –
    some are not.
    Uncertainty & Probability

    • When there is uncertainty about future events


    we can try to use probability theory.
    • Probability theory will hopefully reduce our
    uncertainty.
    • However, probability theory is more useful in
    some situations than others.
    • Consider the following examples:
    Probability Example

    • Consider the following coin tossing exercise:


    • Everybody in a room takes a coin and stands up.
    • Everybody tosses their coin. Those people who
    throw a head sit down and quit the game.
    • If there are say 40 people in the room, how
    many throws will it take before there is just one
    person left standing ?
    Probability
    • You can watch David Spiegelhalter doing this
    exercise with a group of people if you follow the
    following link.
    • Link to lecture
    • (http://understandinguncertainty.org/node/502)
    • If you think about all the different coins being
    tossed, would you expect the results to be so
    predictable?
    Probability
    • What do you think the probability that 2 (or
    more) people in a group of 23 people share the
    same birthday?
    • Follow the link below to see the answer. Is it
    what you expected.
    • Link to article
    • (http://www.bbc.co.uk/news/magazine-27835311)
    Routine Events
    • Probability theory is very useful for predicting
    routine events.
    • For example, what are your journey times to
    work/University each morning?

    Journey Times
    14
    12
    10
    Frequency

    8
    6
    4
    2
    0
    17 20 23 26 29 More
    Time (minutes)
    Probability Theory
    • We can ‘model’ those routine events with an
    appropriate probability distribution, such as The
    Normal Distribution (Bell Curve)
    Rare Events
    • However, some events seem to be much more
    difficult to predict.
    • Why can we not predict major natural disasters
    such as earthquakes?
    Natural Disasters
    Frequency of earthquakes
    (based on observations since 1900)

    Magnitude Average Annually


    8 and higher 1
    7 - 7.9 15
    6 - 6.9 134
    5 - 5.9 1319
    4 - 4.9 13,000 (estimated)
    3 - 3.9 130,000 (estimated)
    2 - 2.9 1,300,000 (estimated)
    What Links the Following?
    • The First World War
    • The dissolution of the Soviet Union
    • The rise of the internet
    • The 9/11 terrorist attacks in the USA
    • The 2008 financial crash
    • Black Swans
    Black Swans
    • Nassim Taleb (2007, 2010) coined the term
    ‘black swan’ to describe a particular type of
    rare event:
    • The event is a surprise (to the observer).
    • The event has a major impact.
    • After the fact, the event is rationalized by
    hindsight, as if it had been expected.
    Deepwater Horizon

    • On the evening of 20 April 2010, a gas release and


    subsequent explosion occurred on the Deepwater
    Horizon oil rig working on an exploration well for
    BP in the Gulf of Mexico.
    • Eleven people died as a result of the accident and
    others were injured.
    • The fire burned for 36 hours before the rig sank,
    and hydrocarbons leaked into the Gulf of Mexico
    before the well was closed and sealed.
    Deepwater Horizon

    • "For BP this was the ultimate low-probability, high-


    impact event – a black swan to borrow a term used
    in the financial crisis." (Chief Executive Hayward,
    2010)
    • "The whole industry had been lulled into a sense of
    false security after 20 years of drilling in deep water
    without a serious accident, till now," said Hayward,
    in criticism which will be challenged by oil rivals
    who have tried to distance themselves from the
    behaviour of the British oil group. Hayward admitted
    the contingency plans drawn up by the company
    were completely inadequate. (Guardian, 2010)
    Scenario Analysis
    • In spite of all the effort that goes into predicting
    the future, there are still major happenings that
    take everyone by surprise: e.g. the Icelandic ash
    cloud, or the Credit Crunch. These events cause
    not only an immediate shake-up in business and
    social life, but set in motion a ripple of activity
    for many years afterwards. It is not the purpose
    of scenario analysis to predict a cataclysmic
    event; instead, it traces the logical
    consequences and side-effects of such an
    event.
    Scenario Analysis
    • The 9/11 terrorist attack caused a number of
    ripple effects. One of which was:
     An increased fear of flying
     Greater use of cars
     A significant increase in road accidents
    Forecasting & Experts
    • When we are uncertain about the future, we
    often turn to so-called experts to make
    predictions.
    • But how accurate are their predictions?
    • For example, economists are always making
    forecasts about the future. But if you look at the
    financial news pages, you will see many
    comments like the following:
    Accuracy of Economic Forecasts?
    • “The International Monetary Fund (IMF) has
    forecast that the world economy will grow
    faster this year than previously expected.”
    • “China's gross domestic product (GDP) grew a
    faster-than-expected 10.3% in 2010, official
    statistics show.”
    • The Irish Republic's economy shrank in the
    second quarter from the previous three months,
    surprising analysts who had been expecting
    growth.
    • The UK's economy suffered a shock contraction
    in the last three months of 2010, figures have
    shown.
    Forecasting & Experts

    Philip Tetlock (2006) has studied the accuracy


    of political experts’ forecasts. He conducted an
    extended research project over 20 years in the
    domain of politics. He tracked how experts
    predicted developments across the world - from
    the Soviet Union to the Middle East – and
    measured how accurate their predictions were.
    Generally, so-called experts were no better at
    predicting the future than people in general.
    (His book identifies different characteristics –
    he distinguishes between foxes and hedgehogs.)
    However, there is one key difference between
    ‘experts’ and people in general - ‘experts’
    generally have more confidence in the accuracy
    of their forecasts.
    Forecasts and Uncertainty
    • It would seem that in many domains we are
    not very good at making accurate forecasts.
    • However, how concerned are we if forecasts
    are wrong?
    • Often, we seem to prefer wrong forecasts to
    uncertainty?
    • For example, imagine what you would think
    if your doctor told you she didn’t know what
    was wrong with you?
    • However, uncertainty is something we can
    not avoid.
    Risk & Uncertainty
    • We started this introduction by considering the
    meaning of the word risk.
    • We saw that traditionally risk management has
    been mainly concerned with avoiding ‘downside
    risks’.
    • For our purposes, we want to take a more
    general approach, as illustrated by the following
    table:
    Risk or Uncertainty
    Management
    Risk management Uncertainty management
    a downside risk a threat (giving rise to downside risk)
    an upside risk an opportunity (giving rise to upside risk)
    a risk (upside or downside) a source of uncertainty
    a (possible) source of risk a source of uncertainty
    a problem an issue
    an impact a consequence/effect
    a weakness an issue
    a poor allocation an inappropriate/unclear allocation
    inadequate inappropriate
    avoid risk resolve uncertainty
    Summary
    • If we know something will happen, it may be a
    problem, but it is not a risk.
    • Risks involve uncertainty. We therefore need a
    very good understanding of why and where
    uncertainty arises.
    • In particular, we need to understand how and
    when we can predict future events – and when
    we can not predict them.

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