Risk and Uncertainty

Progress Choongo
 Session Breakdown
• Introduction
• The origins of Risk
• Risk
• Uncertainty
 Introduction
• Outline the basic concept of risk & uncertainty
• Definitions of risk and uncertainty
• Different sources of risk
• Types of risk
 Introduction
• All projects involve risk – meaning there is a chance
things won’t turn out exactly as planned
• Zero risk project not worth pursuing
• In business, nearly all decisions taken on financial basis
• Business leaders need to understand & know whether
the returns on a project justify taking risk
• Investors need indications of whether returns on an
investment meet minimum returns if investment is fully
exposed to risk identified
• By knowing the full extent of their gains and/or losses,
business leaders and investors can decide whether to
sanction or cancel an investment or project
• Risk identification and quantification in relation to the
economic returns of a project is important
 The origins of Risk
• Origin of risk thought to be either Arabic word risq or Latin word riscum
• Arabic risq signifies anything given to you [by God] from which you draw
profit and has connotations of favourable outcomes
• Latin riscum originally refer to challenge or barrier and has connotations of
unfavourable event
• Greek derivative of Arabic risq appear to relate to chance of outcomes in
general and have neither positive or negative implications
• French risque has mainly negative but occasionally positive connotations
• English definite has negative association e.g. ‘at risk, run risk means
expected danger.
• Risk began to appear in insurance transactions in the 18th century
• Rowe (1997) defines risk as potential for unwanted negative consequences
of an event or activity
• Lowrance (1976) defines risk as a measure of the probability and the
severity of adverse effects
• Rescher (1983) suggested ‘ Risk is the changing of negative outcome
• Risk is defined as “an uncertain event or a set of circumstances that, should
they occur, will have an effect on the achievement of one or project
objective.
 Typical Risk Parameters
Susceptibility to changes Model shown in figure
Or external factors
•Opportunity suggest risk is composed
•Upside & down side result of four essential
parameters
• Probability of occurrence
Severity of Impact (H or L) Probability of occurrence • Severity of impact
• threat Intensity (damage potential (high or low)
• Continuously varying in terms of RISK Probability (0-1)
• Susceptibility to changes
Cost and time Frequency (high or low) • Degrees of
interdependence with risk
or other factors

Degree of Interdependency
With factors or risk
 Uncertainty
• Risk refers to statistically predict occurrence
• Major distinguishing factor between risk and uncertainty
is that risk is taken to have quantifiable attributes
(probabilities whereas uncertainty does not
• Uncertainty affects all investments
• Uncertainty refers to unknown of generally unpredictable
variability
• Unmeasurable unknown (F Knight (1921)
• Uncertainty is used to describe the situation when it is
not possible to attach a probability to the likehood of
occurrence of an event
• Exists in situations where decision makers lack complete
knowledge or understanding of possible consequences
 Causes of Uncertainty
• Unidentified features and factors leading
to deviations from predicted behaviour

• Identified features and factors whose

effects cannot be predicted
 Uncertainty
Uncertainty arises from areas such
as:-
• Innovations
• Inherent uncertainty
• Inadequate analysis
 Project Uncertainties
Other factors that can bring about uncertainty
Include:
• Lack of clarity in structuring the problem
• Inability to identify alternative solutions to the
situation
• The amount and quality of information available
• Amount of time available
• Personal quality of decision makers
• Futuristic nature of decision making
 Uncertainty
Uncertainty
Uncertainty

Proposal Design Development Manufacture

 Summary
• Describe concepts of risk and uncertainty
and their sources