Risk vs. reward decision matrix

Decision Matrix
(know when to hold ’em & when to fold ‘em)
Presented by
Daniel Feiman, MBA, CMC©, Visiting
Professor

dsfeiman@BuildItBackwards.com FENG © Build It Backwards 2012 www.BuildItBackwards.com
310.540.6717 1 All international rights reserved

Risk


Risk comes in 2 sizes & 2 types
Macro 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 changes


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 -


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 you've 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. There's 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?


Dealing with risks
There are four ways of dealing with, or managing, each
individual risk that you identify. You can:
 Accept it
 Transfer it
 Reduce it
 Eliminate it


Decision matrix
 2 basic models
 Risk vs. Reward
 Effort vs. Impact


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?


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; 2011


Decision Matrix makes for better decisions
Typical Decision Analysis
 What is the potential risk involved?
 High
 Medium
 Low
 What is the potential reward if we are successful?
 High
 Medium
 Low


Decision Matrix makes for better decisions
An 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
Pages 233-44; 2011

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
Pages 233-44; 2011

A Risk vs. Reward exercise:
Risk vs. Reward matrix
Choose a few challenges
facing your company today,
think about them in context High
of this matrix & place them
appropriately R
e
w
Medium
a
r
d
Low

*Adapted from THE Book on…BUSINESS
From A to Z: The 260 Most Important Answers Low Medium High
Organization; Build It Backwards Publishing; Risk
Pages 233-44; 2011

Another way to use the Decision Matrix*
Effort vs. Impact matrix
Another 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; 2011


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/Don't
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; 2011


What have you learned today?


Daniel Feiman, MBA, CMC©, Visiting Professor
Consultant, Trainer, Author, Publisher, Reviewer

Daniel Feiman, MBA, CMC®, Visiting Professor is the Founder & Managing Director of Build It
Backwards, a consulting & training firm based in Redondo Beach, CA. He turns Roadblocks into
Roadmaps(SM) by teaching companies how to Assess, Achieve & Accelerate exceptional success; with
measureable 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) Extension
Department (since 1990) has taught at the University of Manchester (UK) & is the Visiting Professor at
the Business School of the University of Huddersfield (UK).
He has consulted with firms in many industries including, manufacturing, distribution, financial
services, oil & gas, education, healthcare, consumer products, legal, & hospitality. His diverse
knowledge-base & world-wide contacts is leveraged to assist his clients in gaining advantages not
available through other resources. (Please see www.BuildItBackwards.com for case studies and
testimonials).
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 business
books with recognized expert authors targeting those who have decided to learn what they really need
to know in the simplest straight forward way; without jargon. Mr. Feiman is the author of numerous
articles and whitepapers, is a contributing author to several books as well as co-author of others. The
latest book in the series, (THE Book on…Business from A to Z: the 260 Most Important Answers You
Need 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 & nontraditional
commercial finance industry. These include lending, marketing, leasing, management and problem loan
workouts.


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/TxRuA


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