Risk management short course

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Copyright 2017 John Goodpasture All Rights Reserved
A very short course in risk management
What could go wrong?
Produced by
Square Peg Consulting, LLC
www.sqpegconsulting.com

So, what’s a risk?
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An event, outcome, activity, or circumstance
about which there is some uncertainty

Always two parameters
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What could happen, to wit:
Impact
How likely for “it” to happen, to wit:
Confidence*
* Anti-confidence: if “it” doesn’t happen, then “anything” else might,
with 100% - %confidence

Narrow the scope
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Scope (uncertainty):
Nearly everything
You have to choose what to manage:
What you can’t afford

1% Doctrine
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No matter how unlikely,
if you can’t afford it,
you have to do something about it

It’s not about tossing dice
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Games of chance have rules
Rules govern impact and confidence
Management can’t change the rules
A fair die is always fair*
* Fairness: only in the long run; in the short run, the house
often wins. Losers paid for the Las Vegas strip

Rules for project uncertainty
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There are no rules
Uncertainty has no rules
Management can intervene
The client is independent
There are no fair die
Stuff happens!

Risk management
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Intervention to affect outcomes
Ignore it It might go away; unmanaged; affordable
Insure it It might happen; unaffordable *
Transfer it Give the problem to someone else
Go around it Advance in a different direction
Change
something
Retool, retrain, resource, reorganize
Destroy it ** Unaffordable; go on the offense
* Only to you; insurance companies make money on “expected
value”, the risk-weighted loss
** See: 1% doctrine and pre-emptive methods

Risk attitude
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More optimistic, top down
More fact-based outlook
Risk is the balancing quality
Client PM
Time changes everything
More time: more optimism
There’s time to fix it
What you don’t know ….
The future has no facts, so
estimate success
Panic in the last mile
Failure is not an option

It’s too tightly coupled
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Risk
Risk
Risk
Tight Coupling
Dependencies*
Risk propagation
* See: merge bias at dependent
outcome

Let’s get loose
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Risk
Risk
Risk
Tight Coupling
Dependencies*
Risk propagation
outcome
Loose coupling
Buffers and white space
Boundaries and fences
Interfaces and handoffs
Encapsulation

Let’s get loose
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Risk
Risk
Risk
Tight Coupling
Dependencies*
Risk propagation
outcome
Loose coupling
Buffers and white space
Absorb the shock
Boundaries and fences
Resist propagation
Interfaces and handoffs
Enforce standards at the
interface
Encapsulation
White box, black box

Top down; bottoms up
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White box, black box
White box: I understand the internal details of construction
White box: bottoms up understanding
Black box: I only understand the external characteristics at the
point of delivery (Done)
Black box: top down understanding

The Principle of Encapsulation
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Me
You
White space
Boundaries
Cloud
Standard interface
Encapsulate to contain risk
within boundaries
• “Hide the sausage making”
• Make a “white” box
“black”
• “Boxes” connect at the point of
delivery
• Loose coupling of the
“white” box details and
risks

Yikes! Black Swan
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Black swan risks
Beyond imagination
It should never happen
Couldn’t see it coming
Consequential impact
Black Swan: Made famous by financial technician Nassim Taleb

Yikes! Black Swan
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Black swan risks
Beyond imagination Myopic
It should never happen Off the chart
Couldn’t see it coming Low on the horizon
Consequential impact “Life” threatening

Anti-fragile
If you don’t (or can’t) manage Black Swan risks, what do you
manage?
• System (or personal) fragility
• Ability to absorb shock without catastrophic failure
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Anti-fragile: Another conception of Nassim Taleb

Black swan shock absorbers
Anti-fragile Shock absorber
Loose coupling
If one thing blows up, the damage doesn’t
propagate *
Redundancy
Independent, but similar, overlaps and
duplications **
Bend, but don’t break Partial products, “bent and scratch” quality
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* Fuses, breakable links
** Backup copies; multiple or distributed sites

Biases = risks
• Everyone has biases
– Which may present behavior and decision risks in some situations
• Even robots have biases
– They’re programmed by us
– They inherit our moral logic and sense of utility*
– Autonomous vehicle: do I save you or the other guy?
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• Utility: the gap between value and cost
High utility: value and cost are aligned

Biases that matter to PM
This stuff matters
Anchor bias
A position everyone is afraid to move too far from----
especially if the anchor is set by an expert or
dominate person (supervisor or superior)
Proximity bias
Reach for the thing that’s closest – typically, inside
the box
Loss aversion
You can’t stand to lose something you have;
fear of change; fear of the unaffordability of the future
Relative utility
$5 matters more to someone who’s hungry and
broke;
aka: Prospect Theory
The value of a prospect is relative to a starting
point. If you’re already rich, a little more doesn’t
matter
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Biases that matter to PM
This stuff matters
Number numbness One is a disaster; 1000 is not much more
Optimism bias The future is rosy; there’s always time to fix it
Confirmation bias Readily accept that which confirms your idea
Framing effect
Conclusions depend on presentation and not the
objectivity of the content
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Learning points
Learning Point take away Commentary
Two parameters for risk
Impact and confidence; confidence implies
there’s also “something else”
Uncertainty has no rules
There are no fair die; You can manage it, but
it’s always there unless you “destroy it”
Time changes risk attitude The future is rosy; the present, less so
Get loose! Keep risk contained; don’t let it spread
Black swans Even when you’re surprised, be anti-fragile
Biases = risks
Biases have many disparate effects;
maintain awareness
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Thought challenge
Biases are a source of risk, but when you say “risk” people ordinarily
think of undesirable outcomes
Thought challenge: In your business, which are the more
problematic: biases or event and circumstance risks?
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