Risk vs. reward decision matrix

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Here is a decision matrix that allows you more comfort that you have made the right decision under risk conditions. The second tool allows you to compare your "effort vs. Impact" to help you prioritize.

Published in: Business, Economy & Finance

Risk vs. reward decision matrix

  1. 1. Decision Matrix (know when to hold ’em & when to fold ‘em) Presented by Daniel Feiman, MBA, CMC©, Visiting Professordsfeiman@BuildItBackwards.com FENG © Build It Backwards 2012 www.BuildItBackwards.com310.540.6717 1 All international rights reserved
  2. 2. Riskdsfeiman@BuildItBackwards.com FENG © Build It Backwards 2012 www.BuildItBackwards.com310.540.6717 2 All international rights reserved
  3. 3. Risk comes in 2 sizes & 2 typesMacro Level Risks: On a macro (large-scale) level there are two main types of risk, these are systematic risk and unsystematic risk. Systematic risk is the risk that cannot be reduced or controlled & it is extremely difficult to predict or protect yourself against.  Inflation  Interest rate increases  Government legislation changes. Unsystematic risk is the risk that is unique to a company or specific asset that can be reduced or eliminated through diversification.  Employee strikes  Capital investment decisions  Management changesdsfeiman@BuildItBackwards.com FENG © Build It Backwards 2012 www.BuildItBackwards.com310.540.6717 3 All international rights reserved
  4. 4. Micro Level Risks More important to most of us, directly, are the micro (small-scale) types of risks that are important when talking about our company. These include:  Business Risk -  Compliance Risk –  Country Risk –  Exchange Rate Risk –  Financial Risk –  Liquidity Risk –  Market Risk –  Political Risk –  Project risk –  Operational Risk  Reputational Risk –  Strategic Risk -dsfeiman@BuildItBackwards.com FENG © Build It Backwards 2012 www.BuildItBackwards.com310.540.6717 4 All international rights reserved
  5. 5. Example Now, consider two versions:  Option 1: Heads, you win $100; Tails, you lose nothing.  Option 2: Heads, you win $300; Tails, you lose $100. In Option 1, you might expect to win as much as $5,000, give or take, and youve got no real risk. In Option 2, you might expect to win as much as $10,000. But you also could lose as much as $10,000; unlikely, but possible. Theres a reasonable chance that you might lose something. How much risk are you willing to tolerate for the expected reward? Or, flip it around... how much reward does it take to justify the risk? How do you decide what decision to make?dsfeiman@BuildItBackwards.com FENG © Build It Backwards 2012 www.BuildItBackwards.com310.540.6717 5 All international rights reserved
  6. 6. Dealing with risksThere are four ways of dealing with, or managing, eachindividual risk that you identify. You can: Accept it Transfer it Reduce it Eliminate itdsfeiman@BuildItBackwards.com FENG © Build It Backwards 2012 www.BuildItBackwards.com310.540.6717 6 All international rights reserved
  7. 7. Decision matrix 2 basic models  Risk vs. Reward  Effort vs. Impactdsfeiman@BuildItBackwards.com FENG © Build It Backwards 2012 www.BuildItBackwards.com310.540.6717 7 All international rights reserved
  8. 8. The typical decision matrix Typical Risk vs. Reward matrix R e High w a r Low d Easy Difficult Risk What is wrong with this approach?dsfeiman@BuildItBackwards.com FENG © Build It Backwards 2012 www.BuildItBackwards.com310.540.6717 8 All international rights reserved
  9. 9. Decision Matrix* makes for better decisions Why is this better? Risk vs. Reward matrix High R e w Medium a r d Low *Adapted from THE Book on…BUSINESS Low Medium High From A to Z: The 260 Most Important Answers Risk You Need to Know; Chapter X – X-Ray Your Organization; Build It Backwards Publishing; Pages 233-44; 2011dsfeiman@BuildItBackwards.com FENG © Build It Backwards 2012 www.BuildItBackwards.com310.540.6717 9 All international rights reserved
  10. 10. Decision Matrix makes for better decisionsTypical Decision Analysis What is the potential risk involved?  High  Medium  Low What is the potential reward if we are successful?  High  Medium  Lowdsfeiman@BuildItBackwards.com FENG © Build It Backwards 2012 www.BuildItBackwards.com310.540.6717 10 All international rights reserved
  11. 11. Decision Matrix makes for better decisionsAn alternative use of this tool: Risk vs. Reward matrix High R e w Medium a r d Low *Adapted from THE Book on…BUSINESS Low Medium High From A to Z: The 260 Most Important Answers You Need to Know; Chapter X – X-Ray Your Risk Organization; Build It Backwards Publishing; Pages 233-44; 2011dsfeiman@BuildItBackwards.com FENG © Build It Backwards 2012 www.BuildItBackwards.com310.540.6717 11 All international rights reserved
  12. 12. Risk vs. Reward matrix Better The High Go for it! than Gambler options R e Better w If we Medium than Hmmm a must nothing r d Down Try to the Low Yawn? avoid rabbit hole *Adapted from THE Book on…BUSINESS Low Medium High From A to Z: The 260 Most Important Answers Risk You Need to Know; Chapter X – X-Ray Your Organization; Build It Backwards Publishing; Pages 233-44; 2011dsfeiman@BuildItBackwards.com FENG © Build It Backwards 2012 www.BuildItBackwards.com310.540.6717 12 All international rights reserved
  13. 13. A Risk vs. Reward exercise: Risk vs. Reward matrixChoose a few challengesfacing your company today,think about them in context Highof this matrix & place themappropriately R e w Medium a r d Low*Adapted from THE Book on…BUSINESSFrom A to Z: The 260 Most Important Answers Low Medium HighYou Need to Know; Chapter X – X-Ray YourOrganization; Build It Backwards Publishing; RiskPages 233-44; 2011dsfeiman@BuildItBackwards.com FENG © Build It Backwards 2012 www.BuildItBackwards.com310.540.6717 13 All international rights reserved
  14. 14. Another way to use the Decision Matrix* Effort vs. Impact matrixAnother way: Qualify High EE/HI ME/HI DE/HI Quantify I Subjective m Objective p Medium EE/MI ME/MI DE/MI a c t Low EE/LI ME/LI DE/LI *Adapted from THE Book on…BUSINESS From A to Easy Medium Difficult Z: The 260 Most Important Answers You Need to Know; Chapter X – X-Ray Your Organization; Build It Effort Backwards Publishing; Pages 233-44; 2011dsfeiman@BuildItBackwards.com FENG © Build It Backwards 2012 www.BuildItBackwards.com310.540.6717 14 All international rights reserved
  15. 15. For the highly visual learners: Effort vs. Impact matrix Quick Major wins/Low projects/W High ME/HI hanging orth the I fruit work m p Medium EE/MI ME/MI DE/MI a c t Fill in Thankless Low jobs/Quick ME/LI tasks/Dont hits bother *Adapted from THE Book on…BUSINESS From A to Easy Medium Difficult Z: The 260 Most Important Answers You Need to Know; Chapter X – X-Ray Your Organization; Build It Effort Backwards Publishing; Pages 233-44; 2011dsfeiman@BuildItBackwards.com FENG © Build It Backwards 2012 www.BuildItBackwards.com310.540.6717 15 All international rights reserved
  16. 16. What have you learned today?dsfeiman@BuildItBackwards.com FENG © Build It Backwards 2012 www.BuildItBackwards.com310.540.6717 16 All international rights reserved
  17. 17. Daniel Feiman, MBA, CMC©, Visiting Professor Consultant, Trainer, Author, Publisher, Reviewer Daniel Feiman, MBA, CMC®, Visiting Professor is the Founder & Managing Director of Build ItBackwards, a consulting & training firm based in Redondo Beach, CA. He turns Roadblocks intoRoadmaps(SM) by teaching companies how to Assess, Achieve & Accelerate exceptional success; withmeasureable results in 90 days. His core competencies include: Strategy; Finance & Process. Mr.Feiman is an internationally recognized seminar facilitator; working with firms such as Apple, ADNOC(United Arab Emirates), ARAMCO (Saudi Arabia), California Institute of International Business &Economics, Credit Suisse, Hilton Hotels International, Institute for Supply Management (ISM), Mattel,PEMEX (México), Promigas (Colombia) Reliance (India), TRW, University of Manchester (UK), & others. He is adjunct faculty at the University of California, Los Angeles (UCLA) ExtensionDepartment (since 1990) has taught at the University of Manchester (UK) & is the Visiting Professor atthe Business School of the University of Huddersfield (UK). He has consulted with firms in many industries including, manufacturing, distribution, financialservices, oil & gas, education, healthcare, consumer products, legal, & hospitality. His diverseknowledge-base & world-wide contacts is leveraged to assist his clients in gaining advantages notavailable through other resources. (Please see www.BuildItBackwards.com for case studies andtestimonials). Mr. Feiman is a reviewer for the New York Journal of books(http://www.nyjournalofbooks.com/) . Build It Backwards Publishing (www.BuildItBackwards.com/Publishing) publishes businessbooks with recognized expert authors targeting those who have decided to learn what they really needto know in the simplest straight forward way; without jargon. Mr. Feiman is the author of numerousarticles and whitepapers, is a contributing author to several books as well as co-author of others. Thelatest book in the series, (THE Book on…Business from A to Z: the 260 Most Important Answers YouNeed to Know) was published this fall. He has been interviewed by television, radio & print resources. Mr. Feiman has over 18 years experience in all facets of both the traditional & nontraditionalcommercial finance industry. These include lending, marketing, leasing, management and problem loanworkouts.dsfeiman@BuildItBackwards.com FENG © Build It Backwards 2012 www.BuildItBackwards.com310.540.6717 17 All international rights reserved
  18. 18. Contacting us: Daniel Feiman, MBA, CMC® Managing Director Build It Backwards(TM) Success by Choice; Not Chance(SM) Office: 310.540.6717 Cell: 818.522.2892 Consulting & Training in: Strategy * Finance * Process dsfeiman@BuildItBackwards.com www.BuildItBackwards.com http://goo.gl/j6F5b http://goo.gl/TxRuAdsfeiman@BuildItBackwards.com FENG © Build It Backwards 2012 www.BuildItBackwards.com310.540.6717 18 All international rights reserved

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