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Risk management short course
This document discusses key concepts in risk management. It defines risk as an event, outcome or circumstance with some degree of uncertainty. There are two parameters of risk - the potential impact and the likelihood or confidence of it occurring. While some risks have rules governing them, project risks have no rules so management must intervene. Various risk management strategies are outlined such as ignoring small risks, insuring against large risks, transferring risks, changing aspects to reduce risks, or directly addressing very large risks. The concepts of loose coupling, encapsulation, and top-down versus bottom-up understanding are also covered in relation to risk management.
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Risk management short course
- 1. 1 Copyright 2017 JohnGoodpasture All Rights Reserved A very short course in risk management What could go wrong? Produced by Square Peg Consulting, LLC www.sqpegconsulting.com
- 2. So, what’s arisk? 2 Copyright 2017 John Goodpasture All Rights Reserved An event, outcome, activity, or circumstance about which there is some uncertainty
- 3. Always two parameters 3 Copyright2017 John Goodpasture All Rights Reserved 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
- 4. Narrow the scope 4 Copyright2017 John Goodpasture All Rights Reserved Scope (uncertainty): Nearly everything You have to choose what to manage: What you can’t afford
- 5. 1% Doctrine 5 Copyright 2017John Goodpasture All Rights Reserved No matter how unlikely, if you can’t afford it, you have to do something about it
- 6. It’s not abouttossing dice 6 Copyright 2017 John Goodpasture All Rights Reserved 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
- 7. Rules for projectuncertainty 7 Copyright 2017 John Goodpasture All Rights Reserved There are no rules Uncertainty has no rules Management can intervene The client is independent There are no fair die Stuff happens!
- 8. Risk management 8 Copyright 2017John Goodpasture All Rights Reserved 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
- 9. Risk attitude 9 Copyright 2017John Goodpasture All Rights Reserved 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
- 10. It’s too tightlycoupled 10 Copyright 2017 John Goodpasture All Rights Reserved Risk Risk Risk Tight Coupling Dependencies* Risk propagation * See: merge bias at dependent outcome
- 11. Let’s get loose 11 Copyright2017 John Goodpasture All Rights Reserved Risk Risk Risk Tight Coupling Dependencies* Risk propagation * See: merge bias at dependent outcome Loose coupling Buffers and white space Boundaries and fences Interfaces and handoffs Encapsulation
- 12. Let’s get loose 12 Copyright2017 John Goodpasture All Rights Reserved Risk Risk Risk Tight Coupling Dependencies* Risk propagation * See: merge bias at dependent 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
- 13. Top down; bottomsup 13 Copyright 2017 John Goodpasture All Rights Reserved 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
- 14. The Principle ofEncapsulation 14 Copyright 2017 John Goodpasture All Rights Reserved 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
- 15. Yikes! Black Swan 15 Copyright2017 John Goodpasture All Rights Reserved 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
- 16. Yikes! Black Swan 16 Copyright2017 John Goodpasture All Rights Reserved 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
- 17. 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 17 Copyright 2017 John Goodpasture All Rights Reserved Anti-fragile: Another conception of Nassim Taleb
- 18. Black swan shockabsorbers 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 18 Copyright 2017 John Goodpasture All Rights Reserved * Fuses, breakable links ** Backup copies; multiple or distributed sites
- 19. 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? 19 Copyright 2017 John Goodpasture All Rights Reserved • Utility: the gap between value and cost High utility: value and cost are aligned
- 20. Biases that matterto 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 20 Copyright 2017 John Goodpasture All Rights Reserved
- 21. Biases that matterto 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 21 Copyright 2017 John Goodpasture All Rights Reserved
- 22. Learning points Learning Pointtake 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 22 Copyright 2017 John Goodpasture All Rights Reserved
- 23. Thought challenge Biases area 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? 23 Copyright 2017 John Goodpasture All Rights Reserved
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