ZEMEN POSTGRADUATE COLLEGE

Project Management Program

Assignment on Decision Theory and Project Risk
Management

Prepared by Azanaw Tsegaw ID=ZPGC/049/2012

Dessie Amhara Ethiopia

1. What is project risk management?

Project risk management is the art and science of identifying, assigning, and responding to risk
throughout the life of a project and in the best interests of meeting project objectives .
Risk management is often overlooked on projects, but it can help improve project success by
helping select good projects, determining project scope, and developing realistic estimates
Project risk is defined by PMI as, "an uncertain event or condition that, if it occurs, has a positive
or negative effect on a project’s objectives."
1.1. Why do we manage risk?
1. Maximizing the positive events consequences of adverse events to project.
2. Defines how a achieve that goal. of identifying, analyzing, risks. probability and
consequences and
3. Minimizing the probability project team will handle and of and objectives.
4. To identify the unknown’s problems that may occur later on in a project
5. To implementing a good plan will allow you to better predict future outcomes
6. Ultimately risk management provides insight in personnel planning and alerts staff of
potential risks. The plan will them analyzed, developed, implemented and motivated to
address all issues before they affect your project cost ,performance ,and schedules
• Requires a firm commitment to risk management from all project stakeholders
• Ensures adequate resources to plan for and manage risk t problems can be reduced as much as
90% by using risk analysis
 Positives:
o More info available during planning
o Improved probability of success/optimum project
 Negatives: Project cut due to risk level

2. What is the importance of project risk management? Discuss briefly.

Risk affects all aspects of your project–your budget, your schedule, your scope, the agreed level
of quality, and so on
• Increase probability of positive event.
• Reduce the occurrence of negative event.

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  Avoiding Disasters
o 80-20 rule
 Avoiding rework
o Rework of erroneous requirements ,design ,code typically consumes
Prime opportunity to improve
 Avoiding overkill
o Focus effort on the critical areas that makes a difference
o Stimulating win-win situations
3. Discuss Project Risk Management processes.
Risk Management Process
This is the systematic application of management policies, procedures and practices to the tasks
of establishing the context, identifying and analyzing, evaluating, treating, monitoring and
communicating risk management strategy be established early in a project and continually
addressed throughout the project life cycle. It Includes, risk management planning, identification,
analysis, response, monitor & control, and implementation

The main elements of the risk management process are listed below.

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  Establish the context
o Establish the context in which the rest of the process will take place
o Criteria against which risk will be evaluated should be established and the structure
of the analysis defined
 Identify risks
o Identify what, why and how things can arise as the basis for further analysis
 Analyze risks
o Determine the existing controls and analyse risks in terms of consequence and
likelihood in the context of those controls
o The analysis should consider the range of potential consequences and how likely
those consequences are to occur
 Evaluate risks
o Compare estimated levels of risk against the pre-established criteria so risks can be
ranked, and management priorities identified
 Treat risks
o Low-priority risks should be monitored and reviewed
o For higher consequence risks, develop and implement a specific management plan
or procedure that includes consideration of all aspects required to mitigate the risk
to an acceptable level
 Monitor and review
o Monitor and review the performance of the risk management system and changes
that might affect it
 Communicate and consult
o Communicate and consult with internal and external stakeholders as appropriate at
each stage of the risk management process as well as the process as a whol
4. What are the tools and techniques used in project risk management?
Risk management tools and techniques are the things and ideas which are used to help to control
risk in a company. They can help an organization to identify, evaluate, reduce or remove risk, so
that these risks will not have as much of a potential impact onto that organization. Tools and
techniques may be formal or informal.

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In order to make project management effective, the managers use risk management tools. It is
necessary to assume the measures referring to the same risk of the project and accomplishing its
objectives
Risk Management Tools & Techniques
The following are some of the best risk management tools and techniques that professional project
managers use to manage their projects against the inevitable risks, issues and changes.
a. Brainstorming:- with the team and experts
b. Root Cause Analysis:- Gets to the main reason for the risk
c. SWOT (Strength ,weakness , opportunities and threats
d. Risk assessment template for IT workers for all projects
e. Risk register :- helps to prioritize which risk are bad
f. Probability and impact matrix combine chance and degree of risk
g. Risk quality data and assessment makes sure your information on the risk accurate
Tool is using project management software, excel and target
1. Checklist
2. Flowcharting
3. Interviewing
5. Discuss the following Points:
A. Risk Tolerance:- risk tolerance defines the attitude or approach that the organization or project
manager has towards the risk
There are three types of risk tolerance
- Risk Tolerance - Risk tolerance defines the attitude or approach that the organisation or project
manager has towards the risk.
“Risk tolerances are the acceptable levels of variation relative to the achievement of objectives.”
There are three types of risk tolerance-
 Risk averse- With the Risk-Averse Approach, the organization or project manager has an
avoidance mentality.
 Risk seeker- With this approach, the Risk seeker is actively looking for risk and is willing
to take risk.
 Risk neutral- In this approach, the Risk neutral person is willing to take the risk but only
if it favors them.

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B. Risk Adverse;- Definition: A risk averse investor is an investor who prefers lower returns with
known risks rather than higher returns with unknown risks. In other words, among various
investments giving the same return with different level of risks, this investor always prefers the
alternative with least interest.
C. Risk Factors;- risk factor is a characteristic, condition, or behaviour that increases the
likelihood of getting a disease or injury. Risk factors are often presented individually, however in
practice they do not occur alone. They often coexist and interact with one another.
D. Decision-making under certainty;- Decision makers know with certainty the consequence of
alternative or decision choice .naturally they will choose the alternative that will result in the best
outcome. Example is making a fixed deposit in a bank.
In this decision-making environment, decision maker has complete knowledge (perfect
information) of outcome due to each decision alternative (course of action).
Several criteria exist for making decision under certainties these condition
1. Maximax(optimistic)
2. Maximin(pessimistic)
3. Criterion of realism
4. Equally likely
5. Minimax regret

E. Decision-making under risk

A decision situation in which several possible state of nature may occur and the probabilities of
these states of nature are known.
The probabilities of event to happen is known, then calculated risk is taken for each states of nature
which is existing and appropriate decision is taken. This decision environment is called decision
making conditions of risk. Ignorance Uncertainty Risk Certainty Increasing Knowledge
The decision under risk are taken based on the following
1. Expected monetary value or expected value(EMV)
2. Expected value of perfect information (EVPI)
3. Expected opportunity loss(EOL)
F. Decision-making under uncertainty
The outcome of a decision alternative is not known, and even its probability is not known

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Decision making under uncertainty If there is more than one states of nature exist, the uncertainty
about the event to happen increase and hence the decision gets affected as there is insufficient
knowledge about the probabilities of any event to happen. This decision environment is called
decision making under uncertainty
A few criteria ( approaches )are available for the decision makers to select according to their
preferences and personalities

G. Sources of Risk on Projects

 Technical Risk – From new, unproven or complex technology (what if it doesn’t work?)
 Quality Risk – From levels of expectations (what if quality measure are set too high?)
 Financial Risk – From budget (what if project goes over budget?)
 Project Management Risk – From improper project management (what if we were wrong in
time and resources allocation?)
 External Risk – From things external to the project such as nature and political situations (what
if a tornado hit or a war erupted?)
6. Identify and discuss the most common project risks
 Cost risk, typically escalation of project costs due to poor cost estimating accuracy and
scope creep.
 Schedule risk, the risk that activities will take longer than expected. Slippages in schedule
typically increase costs and, also, delay the receipt of project benefits, with a possible loss
of competitive advantage.
 Performance risk, the risk that the project will fail to produce results consistent with
project specifications.
 Governance risk relates to board and management performance with regard to ethics,
community stewardship, and company reputation.

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 Strategic risks result from errors in strategy, such as choosing a technology that can’t be
made to work.
 Operational risk includes risks from poor implementation and process problems such as
procurement, production, and distribution.
 Market risks include competition, foreign exchange, commodity markets, and interest rate
risk, as well as liquidity and credit risks.
 Legal risks arise from legal and regulatory obligations, including contract risks and
litigation brought against the organization.
 Risks associated with external hazards, including storms, floods, and earthquakes;
vandalism, sabotage, and terrorism; labor strikes; and civil unrest.
 Sponsor Support.

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