Traditional decision trees are characterized by discrete outcomes. However, Monte Carlo simulation can be combined with a decision tree to have a more rich data set to identify risk. We will show an example of decision tree simulation for an R&D project to see how this works. To simulate a tree, a node’s value (cost …
Modeling risks with little experience seems like a crap shoot. But, modeling variables where we have experience can be equally dangerous due to familiarity bias. When familiarity bias creeps into risk modeling, it can be a serious problem. What is Familiarity Bias? A concise definition of familiarity bias is that we tend to underestimate risks …
Building a spreadsheet model for a business case, product profitability projection, etc. often entails estimating some input factors. The estimates are often a most likely value, an estimated average, or median. These are single-point estimates since you’re only using one number (a single data point) for each input. Finally, you get an output number from …
Decision making under risk and uncertainty is a fact of life. There are many ways of handling unknowns when making a decision. We will try to enumerate the most common methods used to get information prior to decision making under risk and uncertainty. We’ll also look at decision rules used to make the final choice. For …
Decision trees are useful for projects that proceed in stages where investment decisions may change over time. In this application brief, we will use decision tree analysis to evaluate a research and development project where we are uncertain if a commercial product can be produced as a result of the research portion of the project. …
When we try to estimate a project completion time, often the temptation is to use a best guess completion time for each task, find the critical path, and add up the times. This method lacks information about the project schedule risk, and if done honestly, often results in a finish time later than the due …
Exposing Project Schedule Risk Hidden in Best Estimates Read More »
An important part of managing a project is project risk management. Not identifying and managing risks can take down a project in short order. Therefore, risk management should be done for all but the most trivial projects. Even if we are willing to accept a given risk level in order to take advantage of an …
As part of risk management, a project risk analysis is performed to assess the impact of risks and the probability of the risk occurrence. In this article we will look at the differences between qualitative and quantitative project risk analysis. To see how project risk analysis fits within risk management, please refer to this article. …
Qualitative vs. Quantitative Project Risk Analysis – What’s the Difference? Read More »
Risks are everywhere. It’s a wonder that anyone leaves their house each morning to venture into the world, or to venture into projects and investments. In this article we will look at the meaning of risk. There are many definitions of risk depending on the context, or industry. Also, risk is frequently used as a …
Risk is a broad term that can apply to many situations. For this article, we are talking about ways to mitigate business risks to inputs and outputs. Contract employment Use contract employees to scale up/scale down employment needs. The potential downside is having to train temporary employees. Use contract employees that allow for exit if …
Ways to Mitigate Risks to Business Inputs and Outputs Read More »