TOPIC:

ANALYSIS, EVALUATION AND QUANTIFCATION OF RISK.

 WHAT IS RISK ANALYSIS ?
 Risk analysis is the procedure of analyzing and recognizing any kind of risk that
could adversely affect the primary business objective or any critical projects that
are about to take place in an organization in regards to avoiding or to take
necessary initiatives to reduce such risks in the organization.
 Risk analysis, as defined by ADPC. (2011), is a procedure that aids in the
identification, assessment, and reduction of risks to a tolerable level.

Source: Priyanka Bera (2023)

QUANTITATIVE RISK ANALYSIS TECHNIQUES/ METHODS.

Quantitative Risk Analysis(QRA):

 Refers to the thorough and complete numeric analysis of the overall
effect of the total quantifiable amount of risks involved in the project objectives.

 Estimation of overall project risk using quantitative methods helps to distinguish

projects where quantified risks threaten objectives beyond the tolerance of the
stakeholders.

 Purpose and Objectives of (QRA): For numeric estimation of overall effect of risk
on project objectives based on current plans and information. To estimates the
implication of all quantified risks on project objectives.
STRUCTURE OF QUANTITATIVE RISK ANALYSIS
CRITICAL SUCCESS FACTORS NEEDED INORDER TO
PERFORM QUANTITATIVE RISK ANALYSIS PROCESS
 Prior Risk Identification and Quantitative Risk Analysis.
 Appropriate Project Model.
 Commitment to Collecting High-Quality Risk Data.
 Unbiased Data.
 Overall Project Risk Derived from Individual Risks.
 Interrelationships between the Risks in Quantitative Risk Analysis
TYPES OF QUANTITATIVE RISK ANALYSIS TECHNIQUES/
METHODS.
 1. DECISION TREE ANALYSIS:
 Olivas, (2007) states that decision tree includes the costs of each choice, the
probability of occurrence and with that, it assigns a value and outcome. Decision
tree analysis also helps in forming a balanced picture of the risks and rewards
associated with each possible course of action (dey, 2002).
 Solution of the decision tree helps select the decision that provides the highest
Expected Monetary Value or expected utility to the organization.
 Critical success factors:
 Careful structuring of the decision tree; all alternative decisions that are materially different
should be considered; decision trees should be specified completely .
 Access to high-quality data about probability, cost, and reward for the decisions and events
specified using historical information or judgment of experts.
 Use of a utility function that has been validated with the organization’s decision makers.
 Availability and understanding of the specialized software needed to structure and solve the
decision tree.
WEAKNESSES OF DECISION TREE:
 Sometimes difficult to create the decision structure.
 Probabilities of occurrences can be difficult to quantify in the absence of
historical data.
 The best decision may change with relatively plausible changes on the input data,
meaning that the answer may not be stable.
 The organization may not make decisions based on a linear Expected Monetary
Value basis, but rather on a non-linear utility function; these functions are
difficult to specify.
 Analysis of complicated situations requires specialized (through available)
software.
 There may be some resistance to using technical approaches to decision making.
INTERPRETATION OF DECISION TREE
 The negative numbers represent outflows or investments (e.g. COTS).
 The percentage represents probabilities of the event occurring (e.g. Major
Problems).
 The positive numbers represent rewards or values.
 “True” indicates the decision option taken from the square decision node, whereas
“false” indicates the decision option not taken.
2. Expected Monetary Value (EMV)
 This is a statistical technique that helps in comparing and evaluation of risks.
 It can be used jointly with decision trees analysis. Pmi, (2009) stipulated that it is a
statistical concept that calculates the average outcome when the future includes
scenarios that may or may not occur.
 It helps in quantifying risk and it is a product of risk event value and risk event
probability, Raftery, (1994).
 Allows the user to calculate the weighted average (expected) value of an event that
includes uncertain outcomes.
 It is well-suited to Decision Tree Analysis.
 Incorporates both the probability and impact of the uncertain events.
 Simple calculation that does not require special software.
EMV CRITICAL SUCCESS FACTORS INCLUDE:

 Identification of all possible events that need to be included in the EMV calculation.
 Access to historical data or expert opinions on the values of probability and impact that
are needed for the calculation of EMV.
 Understanding of the difference between EMV and the output of simulation tools such
as Monte Carlo analysis.
WEAKNESSES OF EMV
 Assessment of probability of risky events’ occurring and of their impact can be difficult
to make.
 EMV provides only the expected value of uncertain events; risk decisions often require
more information than EMV can provide.
 Sometimes used in situations where Monte Carlo simulation would be more appropriate
and provide additional information about risk.
 HOW EMV IS CALCULATED
 It considers all possible outcomes and the probabilities of each alternative decision or
strategy.
 Multiplying each possible outcome value with their probability and adding all the
results together may help obtain the total result.
 This value is positive for opportunities and negative for threats stefanovic and
stefanovic, (2005).
FORMULA FOR CALCULATING EMV:
4. MONTE CARLO SIMULATION
 This is used along with three-point estimates. It is done to model the probability
of various outcomes in a process that can not handily be estimated because of the
intervention of random variables.
 Anderson,(1986) says that what makes the monte carlo particular are those
various distributions of random number which reflect a particular process in a
chain of process.
 It was also explained by hullet, (2004), as a mechanism of investigating the effect
on strategy of the main risks as simultaneous and non-linear interaction may have
an effect on the otherwise nominal or already settled results.
 Used primarily for project schedule and cost risk analysis in strategic decisions.
 Allows all specified risks to vary simultaneously.
 Calculates quantitative estimates of overall project risk; reflects the reality that
several risks may occur together on the project.
Critical success factors include:

 Critical success factors include:

o Creation of a good project model and typical models include the cost
estimate and the
schedule.
o Use summary-level models such as project schedules and cost estimates.
o Access to high-quality data on risks including the risks impact on project
elements, uncertain
activity durations and uncertain cost elements; the credibility depends on the
quality of the
data collected
o Use of correct simulation tools