Atack of the Black Swan

An Introduction to Risk Assessment
Steven Lipton M.Ed. LEHP, CP-FS
President , Biotest Services Inc.
Vice President, Operations Quality, Scientific Device Laboratory Inc.

Objectives
Define risk
Identify the risk within a process, product or event.
Indentify the three major risk levels
Create a risk analysis chart
Identify and evaluate actions concerning potential Black Swans.

What is Risk
A relationship between
Likeliness of an event
Impact of that event

Impact
May be Positive or negative
WIN!!!
LOSE!!!

Risk Management
Outside of finance, risk management generally deals with negative impacts.

A simple dice game
Roller rolls 5 times
Roller Pays Bank $1 on rolls of 3,4,5
Bank Pays Roller $1 on rolls of 1,2,6

A simple dice game
Roller Pays Bank $1 on rolls of 5,6,7,8,9
Bank Pays Roller $1 on rolls of 2,3, 4,10,11,12

Possible impacts
Lose
Low: $1
Moderate: $3
High: $5
Win
Low: $1
Moderate: $3
High: $5

Probability
High - greater than 50% chance P(A)>0.50
Medium– 25% to 50% 0.25 ≤P(A) ≤ 0.50
Medium Low – 13% up to 25% 0.13 ≤ P(A) ≤ 0.25
Low - 13% P(A)<0.13

Risk Table
I Just don’t want to lose!!!!

Risk Table

Types of risk
Intolerable risk - IR
Alarm or As Low as Reasonably Practical (ALARP) - AL
Broadly acceptable – BA

Risk Table

Risk assessment Form

A simple dice game
Based on evidence for 1-die game, assume even odds.
WAIT!!! There are really only 11 possibilities, not 12! P for dealer is (5/11)- 45%/throw, P for player is (6/11) 54%

A simple dice game
Lose 5 – 1.8%  P1
Lose 3 – 11.6%  P1
Lose 1 – 27.1% P3
Lose 0 – 59.5%P5

Risk assessment Form

A simple dice game
Roller Pays Bank $1 on rolls of 5,6,7,8,9
Bank Pays Roller $1 on rolls of 2,3, 4,10,11,12
Now Play the game!!!

Class Results

Probability
Some events are more likely to happen than others

Simulation Results

A sucker bet

Original Risk Assessment

Revised Risk for Probability

Risk Table
The Black Swan

The Black Swan
Nicholas Nassim Taleb (2006)
A reference to Europeans who only saw white swans and thus thought all swans were white – until they got to Australia.
A black swan event is a High impact, Low probability event.
After a Black Swan event, the event looks like it was inevitable with a simple, obvious explanation.

Changing the rules
If roller wearing anything white, the payoffs to bank and roller switch.
What happens?

Control Measures
Control measures change the impact or the probability of an outcome, and thus change the risk.

Control Measures
Control measures are found by determining the root cause, and finding a way to prevent minimize or eliminate that root cause

Revised Probabilities & Risk

Stopping Black swans
Be creative
Expert advice is anchored to the means, not the extremes
Examine for false impacts and probabilities
Examine for false risk
Examine for hidden risk
Apply control measures once found

Stopping Black Swans
You can’t stop all Black Swans
When you do stop one, virtually no one will know. (Jonah’s Dilemma)

Risk assessment charts
Brainstorm all possible events
Brainstorm all possible outcomes
Place on form and calculate risk
Identify root causes
If there is a control measure for the root cause, note it.
If there is a significant residual risk, see if that is another event/outcome.

Brainstorming
Write down all possibilities for the topic without any editing or rejections
Organize the results

A Short Risk Analysis
Step 1: Decide in your groups a case
Food borne outbreak
Terrorist event
Natural disaster
Epidemic
Step 2: Brain storm all events that could happen during a topic.

Step 3: Events and Effect

Define Impact

Set up risk table

Step 7: Calculate your risk

Step 8: Find the root cause

Step 9: Control measure

Step 3: Calculate residual risk

Questions?
Steven Lipton
Biotest Services
411 East Jarvis Ave Des Plaines IL 60018
steven.j.lipton@gmail.com
Steve@scientificdevice.com
Twitter: @Biotest
http://www.biotestservices.com/risk.php

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Atack of the Black Swan

by Steve Lipton on Jun 11, 2010

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