Some Additional Remarks Concerning the Subject Risk Management

General Definitions

» A "risk is an event with some degree of uncertainty. It may or may not have occured. The objective of assessing risk is to offset any negative impact it may have and pursue any positive impact". Therefore "a risk [...] has good or bad characteristics" (comp. CROSSWIND7, p. 416).

At first there exist different types of risks (comp. CROSSWIND7, pp. 419, 428 ):

  • Pure risks are those "[...] for which insurance can be purchased [...]"
  • Business risks are "uninsurable" because they are inherent part of the work
  • Residual risk "[...] is the amount of risk remaining after risk response"
  • Secondary risk is a risk introduced by "implementing a risk response plan"

Secondly one can classify the risk reactions (comp. CROSSWIND7, pp. 427f ):

  • contigency reserves are planned reserves for known unknowns
  • management reserves are reserves for unknown unknowns which don't arise in the project management plan
  • work around "[...] is a contingency put in action when a risk response plan any any backup plans don't work"

Thirdly one has to distinguish different types  of risks tolerances (comp. CROSSWIND7, p. 419):

  • Risk averse tries to avoid the risk
  • Risk seeker is not afraid of risks
  • Risk neutral is in the middle

»: Risk triggers "[...] are the characteristics which indicate that a risk event is possible in the near future"

Idea of Decision Trees and Expected Monetary Value

Let us assume that we have  to decide whether to go left or right:


going left

going right

AOV = absolute opportunity value



AOP = probability of AOV



EMVO = expected monetary value of opportunity (AOV*AOP)



ATV = absolute threat value



ATP = probability of ATV



EMVT = expected monetary value of threat (ATV*ATP)



EMVS = Sum of Expected Monetary Values (EMVO+EMVT)



EMVS of Going Left is 280, EMVS of Going right is 176, hence go left (although the first impression seems to indicate that you should go right because of the greater possible win)