BUSS 5070 - Project Risk Management

Week 4:Human aspects of managing risk

Dr Udara Ranasinghe
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BUSS 5070 – Project Risk Management
Course Content:

Week 1: Introduction to risk

Week 2: Introduction to project risk management
Week 3: Risk management standards and theories
Week 4: Human aspects of managing risk
Learning outcome
At the completion of this week, you should be able to:
 Identify individual and group aspects that contribute to acceptance of risk
 Understand the factors that influence on perception of risk and risk attitude
 Understand the risk vocabulary
 Understand the different risk terms, their similarities and differences
 Appraise an organisation’s risk perspective when developing criteria to accept or
reject projects
People, Are they Rational?
Why Human factors matter to Risk
Management?
Activity 1.

 What factors contribute to acceptance of risk, your perspective?

Risk Management Process influenced by…

Your Perspective Decision making- Risk

‘State of Mind’ Management process

Attitude

(Chosen response or positioning of a person in

relation to a reference point )
Risk Attitude
How do I view
this fact or
Chosen response to uncertainty
situation?
that matters, driven by perception

(Hillson, 2016)
Risk Attitude

Individual Risk Group Risk Organisational

Attitude Attitude Risk Attitude
Basic Risk Attitudes
 Risk Averse

 Uncomfortable with uncertainty

and has a low tolerance for
ambiguity
 Tends to over–react to threats and
under reacts to opportunities
 Focus on impact rather than
probabilities. Many major threats,
few opportunities
 Aggressive treatments for threats.
 Welcome risk transfer.
 Seek immediate implementation
Risk tolerance

 Reasonably comfortable with

most uncertainty
 Acceptance of the risk as part of
the ‘normal situation” – may
leading to more problems from
impacted threats, and loss of
potential benefits.
 Risk Neutral

 Neither risk-averse nor risk seeking

 But rather seek strategies and
tactics that have high future pay-
offs.
Risk seeking

 Tend to be adaptable and resourceful and

not afraid to take actions
 Likely to identify fewer threats and if
identified underestimated both in
probability and impact and acceptance
will be preferred response, rely on
reactive plans.
 However, sensitive to opportunities and
overestimate their importance and wish
to pursue them aggressively
Risk Attitude

The same individual or group may exhibit different

risk attitudes under different circumstances.
Utility theory
Discuss the relationship between Expected monetary value and utility value

In 1738, Daniel Bernoulli proposed that people do not make choices based on the option
with the best monetary expected value but based on the best utility expected value. So
rational decision-makers will try to maximize utility rather than monetary value.
Utility theory
An organisation is hiring equipment valued at $50,000. It can buy insurance for $500 that
will replace the equipment if it is damaged. The probability of damage occurring is 0.005.

Would you buy insurance?

(Baccarini,2019)
Utility theory
Decision-maker is deciding whether or not to undertake one of two contracts, K and L,
which have been offered to it. It cannot undertake both and suppose that each contract
can lead to only three possible profit/loss outcomes:

Which contractor do you prefer, K or L?

(Baccarini,2019)
Prospect Theory
Prospect theory, identified and explained by Kahneman & Tversky (1982)
Evaluation is relative to a reference point

Example: Today Jack and Jill each have $5m. Yesterday Jack had $1m and Jill had $ 9m.
Are they equally happy? (Do they have the same utility?)
Prospect Theory
How a problem is framed (i.e. presented, worded) can result in different decision-making
responses, particularly when uncertainty is involved.

The CEO has developed two plans:

A. This plan will save 2000 jobs
B. This plan as 1/3 probability of saving all 6000 jobs and 2/3 probability of saving no jobs

Or the problem could be reframed:

C. This plan will result in the loss of 4000 jobs
D. This plan has 2/3 probability of losing all 6000 jobs, but has 1/3 probability of losing no
jobs
Activity 3.

 What factors influence the perception of risk and risk attitude?

DECISION-MAKING UNDER UNCERTAINTY

Overconfidence
Availability Heuristic
Representativeness Heuristic
Optimism Bias
Risk Attitude – Organisation’s Influence on Risk Management

Project Uncertainty Management -DJ Baccarinì, 2019

Risk Appetite

Tendency of an individual or group to take risk in a given situation

(Hillson and Murray, 2012)- Short guide to risk appetite)

The level of risk that an organisation/person is prepared to accept to

achieve its goals and objectives (ISO, 2018)
Risk Appetite

Example of classifications of risk appetite is provided by HM Treasury (2006a):

 Averse - Avoidance of risk and uncertainty is a key organisational objective

 Minimalist - Preferences for ultra-safe options that have low inherent risk and only
have potential for limited reward
 Cautious - Preference for safe options that have low residual risk and may only have
potential for limited reward
 Open - Willing to consider all options and chose one that is most likely to result in
success with acceptable reward
 Hungry - Eager to innovate and chose options offering potential higher rewards,
despite greater inherent risk
Risk Appetite
The tendency of an individual to take
risk in general informed by inherent
risk preference
Those aspects of an
individual’s personality
and motivation that
influence their risk
propensity

Shared beliefs, values

and knowledge of a
group about risk
Risk appetite can’t be measured

We are able to assign values to risk thresholds and risk tolerance in practice
Risk tolerance statement
Risk tolerance
Risk management policy- (Australia government – department of finance, 2016)
Activity 3.

 Discuss in group of 4 students

 Are Risk appetite and Risk attitude different concepts?
 Support your answer by identifying similarities/differences
Risk Appetite and Risk Attitude
Ability of an entity to bear risk,
quantified against objectives

Quantified measures that

represent upper and lower limits
of acceptable uncertainty against
each objective

Level of risk exposure remaining

after agreed actions have been
implemented
Risk Appetite
Risk Appetite vs Risk Tolerance/Acceptability - Same or
Different?
Activity 3.

Discuss the following questions within your groups:

 Why is risk management a dynamic issue?

 Will a project always have the same willingness to accept or not
accept risks throughout its life cycle? Why?
Learn More about Risk Appetite

Rittenberg Dr.Larry and Frank Martens, ‘Understanding and Communicating Risk

Appetite’ ommittee of Sponsoring Organizations of the Treadway Commission
(COSO) (here)
Risky questions and related concepts

How much risk do we usually like to take (Risk propensity/Risk culture)

How much risk do we want to take (Risk appetite)
How much risk can we take (Risk capacity)
How much risk do we think we are taking (Risk perception)
How much risk do we think we should take (Risk attitude)
How much risk are we taking (Risk exposure)
Activity 4
How do you determine what risk appetite your organisation has? (if you don't have an
organisation then pretend you are part of your local council, and have a look at their web
sites)
Discuss how your organisation decides on what projects it will accept or reject. Does
their selection criteria include consideration of the risk of the project to the
organisation’s overall risk profile?
Risk Appetite & Risk Attitude
Activity 5
Let’s watch a video about one of the biggest scandals in the US!

 Why was Enron willing to accept

such high levels of risk?

 Why were its clients willing to

accept so much risk?

 Why did Enron’s people appear to

accept the risk so willingly?