This presentation discusses decision making and risk analysis. It begins with an introduction to decision making, defining it as the process of choosing among alternatives. It then covers understanding risk and uncertainty, and expected monetary value as a method for quantifying risk. Specific topics covered include decision making components and concepts, strategies like optimizing and satisficing, and procedures like identifying goals and rating alternatives. For risk analysis, frameworks, identification, quantification techniques like expected value and decision trees are discussed. Expected monetary value is explained as a way to compare risks and opportunities in monetary terms. An example using a decision tree analyzes building, buying, or staying with software in terms of probability and monetary impacts.

1. PRESENTATION ON
“ DECISION AND RISK ANALYSIS”
Presented by:
Indra Bahadur Biswakarma
Mechanical Engineer
Date: 04/12/2073

2. OUTLINE
 Introduction to decision making
 Understanding risk and uncertainty
 Understanding Expected monetary value( EMV)
2

3. DECISION MAKING
Definition
 Decision making is the process of making choice or
selecting one option among the available and
known alternatives.
3

4. DECISION MAKING...
Components
4
Decision Environment
( the collection of
information, alternatives,
values and preferences)
 ( ideal- if given all
possible information and
alternatives accurately, but
due to time limitation, both
are constraint)
Quantity of
information
Human mind
process Limited data,
if more processing is
biased towards first
part
Decision Stream
Out of or on the
basis of many
parallel possible
decision,Choose1
Madden decision
affects further
decision and
available
alternatives

5. DECISION MAKING...
Concepts
a. Information:
-this is knowledge about decision, its effects,
alternatives and probabilities of alternatives
(substantial information is desirable, more info,
reduce quality of decision)
b. Alternatives :
- diff. Possibilities
c. Criteria:
-criteria of alternatives (e.g. Nano car ranks 1 for
cost but Toyota ranks1 for safety, which to choose,
cost and safety is criteria) 5

6. DECISION MAKING...
d. Goals:
e. Values
- ( in terms of price, satisfaction, safety etc)
f. Preference
-( philoshopy, moral hierarchy e.g. Gods, family, religion,
society etc. )
g. Decision Quality
-(rating of good or bad decision, good decision may
have good or bad outcomes, e.g. For terrorist.)
h. Acceptance
-( affecting/implementing ones must accept the
decision)
6

7. DECISION MAKING...
Strategies
7
1. Optimizing
 Strategy of
choosing
best possible
soln. to the
problem from
many
alternatives
2. Satisficing
Choosing
satisfactory
and sufficient
alternatives
(e.g.. Buy
inexpensive
mobile)
3. Maximax
Selecting
alternative
based on
their
maximum
payoff.
Optimistic
For risk
takers, not
considering
loss
4. Maximin
“Maximize
the minimum”
Decision
based on worst
possible
outcomes.
Pessimistic
A protect
strategy,

8. DECISION MAKING...
Procedures
“ I Get De Ra Ra Decision”
1. Identify decision to make and goals
2. Get facts
3. DEvelops alternatives
4. Rate each alternatives
5. Rate risk of each alternatives (in ratios/grade)
6. Make decision
8

9. RISK MANAGEMENT
Introduction
 An evaluation of potential risks can shows at early
stage whether or not a proposal is worth pursuing.
 Risk management means identifying/analysing
potential risks so that it can be managed on
ongoing basis.
 Not always risk is proportional to return.
 Risk as trade off- follow cheaper method to save
money, lead to redo work.
9

10. RISK MANAGEMENT...
Framework of risk management
10

11. RISK MANAGEMENT...
1. Risk Identification
a. Key risk symptoms-
-put indicator of risk
b. External sources
- get outsider expert opinions
c. TCQ analysis
-Time(critical path analysis, risky activity
might not fall in critical path, check)
- Cost( estimates may vary)
- Quality(assure process done by outsider)
d. Assumptions
11

12. RISK MANAGEMENT...
2. Risk Quantification (likelihood, effect, hideability)
- how much risky,
- effect of risk (major, minor)
-how fast the problem be detected until be late
3. Risk response control/mitigation
- employ corrective actions
- (give opportunities to explore new ideas)
12

13. RISK MANAGEMENT...
Different risk Quantification techniques
1. Expected Value
-the Probability of possible occurrence of outcome
(e.g. If a project has 50% chances of yielding a profit
of 30,000,000, expected value=15000000, find
expected value and compare with other)
2. Sensitivity analysis
- here we vary one major input and see the
corresponding change in outcome.
- as the contract price is fixed in advance, project
manager needs to see the effect of fluctuations on
bottom line. 13

14. RISK MANAGEMENT...
Different risk Quantification techniques…
3. Monte Carlo Simulation
-named after famous monte carlo casino city
-computerized, mathematical technique, which
gives possible outcomes and the probability they
will occur for any choice of action
4. Failure mode effect analysis (FMEA)
-most extensively used in industry
- failure modes are any errors/defects in
process/item, those effects customer and effect
analysis refers to studying the consequences
14

15. RISK MANAGEMENT...
Different risk Quantification techniques…
4…
- Total risk= Severity*Likelihood*Hideability
( each rated for 1-10 scale)
Thus, FMEA
 Minimize severity
 Minimize likelihood of failure
 Improve the detection
15

16. RISK MANAGEMENT...
Different risk Quantification techniques…
5. Program Evaluation and Review Technique (PERT)
- here for every event find ( optimistic time(Ot),
pessimistic time (Pt), most likely time (Mt))
- from this we find,
Expected time= (Ot+Pt+4*Mt)/6
- PERT is a method of analyzing the tasks involved in
completing a given project, especially the time
needed to complete each task, and to identify the
minimum time needed to complete the total project.
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17. RISK MANAGEMENT...
5. Program Evaluation and Review Technique
(PERT)… (example)
In the following example there are seven tasks,
labeled A through G. Some tasks can be done
concurrently (A and B) while others cannot be done
until their predecessor task is complete (C cannot
begin until A is complete). Additionally, each task
has three time estimates: the optimistic time
estimate (o), the most likely or normal time estimate
(m), and the pessimistic time estimate (p). The
expected time (te) is computed using the formula
(o + 4m + p) ÷ 6. 17

18. RISK MANAGEMENT...
5. Program Evaluation and Review Technique
(PERT)… (example)
18

19. RISK MANAGEMENT...
5. Program Evaluation and Review Technique
(PERT)… (example)
19

20. RISK MANAGEMENT...
Risk Assessment
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a. Qualitative risk assessment
- Just rank the value 1-10
- All identified risks are plotted
on matrix chart
- On bar chart, probability
along horizontal and impact
along vertical
- Risk= probability*impact,
highest value need attention
but smaller one can be
neglected
b. Quantitative risk assessment
-Assign numbers to risk based on
various risk report, and data
-One important method by
i) expected monetary value

21. RISK MANAGEMENT...
Risk Assessment…
Quantitaive analysis…
1. Expected Monetary Value (EMV)
 After conducting a qualitative risk analysis, you will
have a list of risk with a priority and urgency
assigned.
 By using EMV, we can quantify each risk
 It compares risk in terms of monetary value, +ve for
opportunities and –Ve for threats
21

22. RISK MANAGEMENT...
Risk Assessment…
Quantitaive analysis…
1. Expected Monetary Value (EMV)…
Steps
a) Assign probability of risk occurrence
b) Assign monetary value for risk’s impacts
c) EMV= multiply above two
d) Assign +ve sign for opportunity and –ve for threat
Note: in risk management you address both +ve & -ve
22

23. RISK MANAGEMENT...
1. Expected Monetary Value (EMV)…
Example:
Suppose for a construction company, following are
key project risk:
a)weather (25% chance of snowfall, which cost
$80000), (-ve= threats)
b)cost of construction material (10% chance of cost
drop, which save $100000), (+ve= opportunities)
c) labor turmoil (5% chance of strike, which loss
$150000), (-ve= threats)
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24. RISK MANAGEMENT...
1. Expected Monetary Value (EMV)…
Example:
Now, monetary value-
Weather: 25/100* (-$80000)=-$20K
Cost of construction material: 10/100*($100000)=$10K
Labor turmoil: 5/100*(-$150000)=-$7500
EMV= -$20K+$10K-$7500=-$17500
It means if all risk occurs in the project, project would
loss $17500. So, for this, project manager can add
$17500 amount to the budget to compensate. 24

25. RISK MANAGEMENT...
2. Decision tree analysis for EMV
-Business or project decisions vary with situations,
which in- turn are full with threats and opportunities.
Calculating the Expected Monetary Value of each
possible decision path is a way to quantify each
decision in monetary terms.
Steps
i. Document decision in decision tree
ii. Assign probability of occurrence of that risk for that
decision
iii. Assign monetary value to impact of that risk
iv. Compute EMV for each path 25

26. RISK MANAGEMENT...
2. Decision tree analysis for EMV
Example
If you have the scenario,
a. Build the new software: (associated cost is
$500,000)
b. Buy the new software: (the associated cost is $750,000)
c. Stay with the legacy software: (the associated cost is
$100,000, for maintenance mainly here)
26

27. .
.
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28. RISK MANAGEMENT...
Example…
Build the new software: $ 2,000,000 * 0.4 = $ 800,000
—Buy the new software: $ 2,000,000 * 0.05 = $ 100,000
—Staying with the legacy software: $ 2,000,000 * 1 = 2,000,000
Now, add the setup costs to each Expected MonetaryValue:
—Build the new software: $ 500,000 + $ 800,000 = $1,300,000
—Buy the new software: $ 750,000 + $ 100,000 = $ 850,000
—Staying with the legacy software: $ 100,000 + $ 2,000,000
= $ 2,100,000
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29. .
Thank you
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