IT Risk Management

A.K. Swain

Certainty and Uncertainty

Franklins Law:
Nothing is certain but death and taxes.

Certainty to Uncertainty

Role of Facts

Role of Judgment

Simplistic

Deterministic

Random

Indeterminate

Human Brain and Uncertainty

Innumeracy:
The inability to think with numbers.

Statistical Innumeracy:
The inability to reason about uncertainties and risk.

The Necker Cube

Certainty Effect (Roger Shepard, 1990)

Zen Buddhism
Before you study Zen, rivers are rivers, and mountains are mountains. While you are studying Zen, rivers are no longer rivers, mountains are no longer mountains. When you have finished studying Zen, rivers are once again rivers, mountains are again mountains.

Buddhist Proverb

Zen & the Art of Risk Management

First there is a mountain, then there is no mountain, then there is a mountain.
Zen koan

Koan First, there is no project Then there is a project Then there is no project Then you negotiate Then it changes

Meaning Theres a problem, an opportunitya gap Somebody has an idea about what should be done As you look at the idea more closely, all sorts of problems emerge You establish objectives/plans Then it changes

What is Risk?
An uncertainty is called a risk when it can be expressed as a number such as a probability or frequency on the basis of empirical data.

How Uncertainty is Different from Risk?

Uncertainty is used in the situation where lack of empirical evidence makes it impossible or undesirable to assign numbers to the possible alternative outcomes.

When does an Uncertainty Qualify as a Risk?

How we Interpret Probability?
Degree belief Propensity Frequency
Subjective Probability

Exercise 1: Problem Description

A boy is often late for school. When approached by his teacher, he explained that it is not his fault. Then he provided some details. His father takes him from home to the bus stop every morning. The bus is supposed to leave at 8:00 am, but this departure time is only approximate. The bus arrives at the stop anytime between 7:58 and 8:02 and immediately departs. The boy and his father aim at arriving at the bus stop at 8:00, however, due to variable traffic conditions they arrive anytime between 7:55 and 8:01. This is why the boy misses the bus so often. Can you determine how often the boy is late for school?

Exercise 1: Analysis
As we know, the two variables of the problem are: x: arrival/departure time of the bus,

7 : 58 x 8 : 02
y: arrival time of the boy,

7 : 55 y 8 : 01

Exercise 1: Arrival Interval 1min

Possible arrivals: every minute

Prob = 6/35 ~= 17%

Exercise 1: Arrival Interval 10s

Possible arrivals: every 10 second

Prob = 171/925 ~= 18.5%

Exercise 1: Exact Answer

The line x = y divides the rectangle into two areas: area x < y (dark part) when the boy is late for the bus, and area x y (light part), when the boy is on time

Prob = 18.75%

The Notion of Risk

The notion of risk is inextricably linked to the notion of uncertainty. Uncertainty is having multiple potential outcomes for any situation. Our perception of risk arises from our perception of and quantification of uncertainty.

Uncertainty: Types
Randomness:
Occurs with a precisely described, repetitive experiment with observable but uncertain outcomes Probability Theory.

Subjective Probability:
Models the degree of belief of a rational individual with respect to precisely defined, observable, but not necessarily repetitive phenomena.

Vagueness or Imprecision:
Arises when the outcome of the experiment cannot properly be observed Fuzzy-Set Theory.

Ambiguity:
Arises when a verbal statement has a number of distinct meanings so that only the context may clarify what the speaker really wants to say.

Possibility Theory:
Models the degree of ease for a particular event occurs.

The END

1/20/2014

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