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Uncertainty_and_Risk.pptx
1. UNCERTAINTY AND RISK
NOT ALL UNCERTAINTY IS RISK; ALL RISKS ARE UNCERTAIN
MANAGING RISK IN PROJECTS
BY:-ISRAR KHAN RAJA - PRESTON UNIVERSITY-ISLAMABAD
2. UNCERTAINTY AND RISK
the range of uncertainties facing us in the modern world are both extensive and
pervasive.
all uncertainties are not matter equally, and some do not matter at all.
separate out those uncertainties which matter, and to develop appropriate
responses to them.
The degree to which something matters can be described in terms of its effect on
our ability to achieve our objectives, at whatever level those exist.
3. UNCERTAINTY AND RISK
A pragmatic approach to ‘risk’ treats it as that subset of uncertainty which matters
because if it occurs it will affect achievement of objectives.
Risk management offers a solution to our need to address uncertainty, since it
provides us with a structured way of identifying and managing those sources of
potential variation which matter.
The definition of risk as ‘uncertainty that, if it occurs, will affect achievement of
objectives’ includes both negative and positive risks, threats and opportunities,
both of which are types of future uncertainty, differing only in the nature of their
impact on objectives.
All of this is important for projects, which are designed to achieve specific
objectives in order to deliver value and benefits to the organization.
4. Risk and Uncertainty
Frank Knight summarized the difference between risk and uncertainty
"… Uncertainty must be taken in a sense radically distinct from the familiar notion
of Risk, from which it has never been properly separated. … The essential fact is
that "risk" means in some cases a quantity susceptible of measurement, while at
other times it is something distinctly not of this character; and there are far-
reaching and crucial differences in the bearings of the phenomena depending on
which of the two is really present and operating. … It will appear that a
measurable uncertainty, or "risk" proper, as we shall use the term, is so far
different from an un-measurable one that it is not in effect an uncertainty at all
5. Current Sources of Uncertainty
Natural environment
Social environment
Political environment
Economic environment
Technological environment
Business environment
Pandemics
Financial Environment
Globalization and international business
Terrorism
Climate changes
Global warming
6. Current Sources of Uncertainty
This rapid rise in uncertainty in so many dimensions of modern life has led to a
crisis of confidence, wit ,many believe the world is both out of control and
uncontrollable
7. Black Swan Theory
Events which are rear, with extreme impacts, and which people try to rationalize post hoc into
retrospective predictability.
Such events have shaped all of human history, and that they should be expected even though
cannot be predicted.
The black swan theory or theory of black swan events is a metaphor that describes an event that
comes as a surprise, has a major effect, and is often inappropriately rationalized after the fact with
the benefit of hindsight.
The theory was developed by Nassim Nicholas Taleb to explain:
The disproportionate role of high-profile, hard-to-predict, and rare events that are beyond the
realm of normal expectations in history, science, finance, and technology.
8. Black Swan Theory
The non-computability of the probability of the consequential rare events using
scientific methods (owing to the very nature of small probabilities).
The psychological biases that blind people, individually and collectively, to
uncertainty and to a rare event's massive role in historical affairs.
Unlike the earlier philosophical "black swan problem", the "black swan theory"
refers only to unexpected events of large magnitude and consequence and their
dominant role in history. Such events, considered extreme outliers, collectively
play vastly larger roles than regular occurrences
11. the Old World and the New World, and that
businesses need to change their paradigm in
order to survive and prosper.
12. Distinguishing Between Uncertainty and
Risk
Uncertainty
Lacking certainty; not able to be accurately known
or predicted; not precisely determined, established
or decided; liable to variation; changeable.
Ambiguity, ambivalence, anxiety, changeableness,
concern, confusion, conjecture, contingency,
dilemma, disquiet, distrust, doubtfulness,
guesswork, hesitancy, hesitation, incertitude,
inconclusiveness, indecision, irresolution,
misgiving, mistrust, mystification, oscillation,
perplexity, qualm, quandary, query, reserve,
scruple, skepticism, suspicion, trouble, uneasiness,
unpredictability, vagueness.
Risk
Possibility of incurrin misfortune or loss;
hazard; involving danger, perilous.
Accident, brinksmanship, contingency,
danger, exposure, fortuity, fortune,
gamble, hazard, jeopardy, liability, luck,
openness, opportunity, peril, possibility,
prospect, speculation, uncertainty,
venture, wager.
13. A Pragmatic Distinction
the task of risk management is quite specific. It is to enable individuals, groups
and organizations to make appropriate decisions in the light of the uncertainties
that surround them.
The key word here is ‘appropriate’. How can we determine what response is
appropriate for any particular uncertainty?
One way is to separate the various uncertainties into two groups:
those that matter to us, and
those that do not matter.
14. A Pragmatic Distinction
There are perhaps an infinite number of uncertainties in the universe but they do not matter
equally, indeed some do not matter at all while others are literally vital.
As we seek to make sense of our uncertain environment and decide what to do in order to move
forward, we need to know which uncertainties matter, and then respond appropriately to those.
Any uncertainties which do not matter can be ignored, or perhaps reviewed from time to time to
see whether they or our circumstances have changed to the point where they might now matter.
This leads to a proto-definition of ‘risk’ which offers a useful distinction to guide our thinking and
practice:
‘risk’ is ‘uncertainty that matters’
15. Uncertainty ...... That matters
‘UNCERTAINTY … ’
‘An uncertain event or condition …’
‘The combination of the probability of an event …’
‘An uncertain event or set of circumstances …’
‘The chance of something happening …’
‘Combination of the probability of an event occurring …’
‘Effect of uncertainty …’
‘Uncertainty inherent in plans and the possibility of something
happening (i.e. a contingency) …’
‘An uncertain event or set of events …’
‘A risk is measured by a combination of the probability of a perceived
threat or opportunity occurring …’
‘A possible occurrence …’
‘… THAT MATTERS’
‘… that if it occurs has a positive or negative effect on a project’s objectives.’
‘… and its consequences.’
‘… that should it or they occur would have an effect on achievement of one
or more project objectives.’
‘… that will have an impact on objectives.’
‘… and its consequences on project objectives.’
‘… on objectives.’
‘… that can affect the prospects of achieving business or project goals.’
‘… that should it occur will have an effect on the achievement of objectives.’
‘… and the magnitude of its impact on objectives.’
‘… which could affect (positively or negatively) the achievement of the
objectives for the investment.’
16. Three Refinements
Risks as Opportunities
Risks linking uncertainty with objective
Risks management has a particular importance for project management
17. Risks as Opportunities
that the effects of risk on objectives are not wholly negative, these could be
‘positive or negative’
Such positive possibilities are usually called ‘opportunities’.
view these merely as ‘good luck’, the unlooked-for fortuitous events that could
save time, save money, increase productivity, enhance reputation and so on
‘risk’, as possible future events that might occur, and which if they were to occur
would have an effect on achievement of objectives, and which therefore require
us to identify and manage them proactively.
18. Distinct Benefits of the concept of risk as
‘’threat and opportunity’’
Exploits more opportunities
Permits trade-offs
Increases chance of success
Supports innovation and creativity
Increases efficiency
Motivates teams
19. Risks linking uncertainty with objective
If risk is defined as ‘uncertainty that, if it occurs, will affect achievement of
objectives’, then it applies wherever there are objectives.
Risk management is not just relevant to technical or delivery disciplines, but
affects every part of an organization from top to bottom.
Successful identification and management of uncertainties that matter is essential
for success across the business at every level.
20. Risks Management in Project Management
it is true that objectives are important at all levels, they are particularly relevant to
projects.
These are launched to create the deliverables and capabilities which deliver value
to and through the business.
Setting and achieving objectives are at the heart of project management, and
they are the focus of most of the activities at this level.
As a result, risk management has a particular importance for project
management