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  • Kiss Approach To Risk Based Decision Making

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    Cesar oboni
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    Who doesn't have to make decisions? Private decisions? Job related/business decisions? No matter your age, position, job, we all have to make decisions almost on a day to day basis. Decisions alternatives, even the straight forward ones, often have hidden/secondary effects, and most of the time are made more difficult by our perception, sentimental values etc. Large corporations sometimes use highly sophisticated procedures to support their decisions on capital expenditure, investments, processes, and yet, oftentimes, they realize afterwards that the best option was not selected. Not to dig the dagger in the wound or work on the obvious, but if the world went into the global economic recession and crisis we have endured, it was precisely because decision making was based on improper parameters. The reason for these problems afflicting decision making is that risks (positive= winning aspects, negative=failure aspects) are not properly accounted for each alternative, and alternatives are not properly compared among each other. What you will find in here is a KISS (Keep it Simple) approach to decision making, applicable to any type of decision. In order to make it really simple, we had to simplify some areas to the bone (hence the remarks about a mathematician most likely fainting when reading our explanations). More sophisticated and rigorous methods do exist, especially if you want to compare in detail long term alternatives and produce/evaluate their financial results. We have books, blogs, courses and web site talking about them, but the purpose here was to really bring a somewhat impervious subject to the point it make sense for everyone to use it on a day to day basis, with a minimum of remote supervision/coaching. Welcome to the world of transparent, justifiable, decision making!

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    Who doesn't have to make decisions? Private decisions? Job related/business decisions? No matter your age, position, job, we all have to make decisions almost on a day to day basis. Decisions alternatives, even the straight forward ones, often have hidden/secondary effects, and most of the time are made more difficult by our perception, sentimental values etc. Large corporations sometimes use highly sophisticated procedures to support their decisions on capital expenditure, investments, processes, and yet, oftentimes, they realize afterwards that the best option was not selected. Not to dig the dagger in the wound or work on the obvious, but if the world went into the global economic recession and crisis we have endured, it was precisely because decision making was based on improper parameters. The reason for these problems afflicting decision making is that risks (positive= winning aspects, negative=failure aspects) are not properly accounted for each alternative, and alternatives are not properly compared among each other. What you will find in here is a KISS (Keep it Simple) approach to decision making, applicable to any type of decision. In order to make it really simple, we had to simplify some areas to the bone (hence the remarks about a mathematician most likely fainting when reading our explanations). More sophisticated and rigorous methods do exist, especially if you want to compare in detail long term alternatives and produce/evaluate their financial results. We have books, blogs, courses and web site talking about them, but the purpose here was to really bring a somewhat impervious subject to the point it make sense for everyone to use it on a day to day basis, with a minimum of remote supervision/coaching. Welcome to the world of transparent, justifiable, decision making!

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    Attribution Non-Commercial (BY-NC)
    Download as PDF, TXT or read online from Scribd
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    125 views31 pages

    Kiss Approach To Risk Based Decision Making

    Uploaded by

    Cesar oboni
    Who doesn't have to make decisions? Private decisions? Job related/business decisions? No matter your age, position, job, we all have to make decisions almost on a day to day basis. Decisions alternatives, even the straight forward ones, often have hidden/secondary effects, and most of the time are made more difficult by our perception, sentimental values etc. Large corporations sometimes use highly sophisticated procedures to support their decisions on capital expenditure, investments, processes, and yet, oftentimes, they realize afterwards that the best option was not selected. Not to dig the dagger in the wound or work on the obvious, but if the world went into the global economic recession and crisis we have endured, it was precisely because decision making was based on improper parameters. The reason for these problems afflicting decision making is that risks (positive= winning aspects, negative=failure aspects) are not properly accounted for each alternative, and alternatives are not properly compared among each other. What you will find in here is a KISS (Keep it Simple) approach to decision making, applicable to any type of decision. In order to make it really simple, we had to simplify some areas to the bone (hence the remarks about a mathematician most likely fainting when reading our explanations). More sophisticated and rigorous methods do exist, especially if you want to compare in detail long term alternatives and produce/evaluate their financial results. We have books, blogs, courses and web site talking about them, but the purpose here was to really bring a somewhat impervious subject to the point it make sense for everyone to use it on a day to day basis, with a minimum of remote supervision/coaching. Welcome to the world of transparent, justifiable, decision making!

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    of 31

    KISS* Approach to Risk Based

    Alternative Selection: A Guide


    to Improvement and Success

    By F.+C. Oboni              * KISS=Keep it Simple
    Riskope International SA © 2009 www.riskope.com
        1
    ISBN: 978-0-9784462-3-9
    Hi, my name is
    Stake,
    Mat Stake and
    I ....

    Riskope International SA © 2009 www.riskope.com


        2
    ISBN: 978-0-9784462-3-9
    ...need to decide among these alternatives:
    Alternative # 1 # 2 # 3
    Description of 
    each Alternative  Introduce a  Modify your 
    your have to  Maintain  new  procedures 
    select from Status Quo process... with....
    Alternative 1 Alternative 2 Alternative 3
    Bla bla Bla Bla Bla Bla

    Of course you can write the description of the three (or more) 
    alternatives you have to select from to “customize” or “own” the 
    example. It will be clearer to you.
    A lawyer could use this scheme to select, for example,  among 
    negotiating, going through a simplified procedure, or a full pledged 
    litigation. 
    An IT specialist could use this to decide changes to a network, a 
    Manager of an operation could use this to decide process changes etc.
    Riskope International SA © 2009 www.riskope.com
        3
    ISBN: 978-0-9784462-3-9
    Of course it's very important for me to 
    select the best alternative. 
    In the past I have trusted my intuition, asked people.... 

    I know I could have made better, but I did not know how...

    One thing I have learned, however....

    Riskope International SA © 2009 www.riskope.com


        4
    ISBN: 978-0-9784462-3-9
    Good decisions have mortal 
    Enemies. Here are a few examples:

     Pit Fall                                                        Rozy Scenario         

    Riskope International SA © 2009 www.riskope.com


        5
    ISBN: 978-0-9784462-3-9
    ...and of course I could not forget 
    to mention these two...

     Perryl Shield                                              Dr. Noel Tall         

    Riskope International SA © 2009 www.riskope.com


        6
    ISBN: 978-0-9784462-3-9
    By quantifying upside and downside risks I could 
    probably make a better decision, but I did not know how...
    ...until I met these two guys...

    Riskope International SA © 2009 www.riskope.com


        7
    ISBN: 978-0-9784462-3-9
    They said I could do it,  without being an expert/
    mathematician, with their facilitation/supervision.

    They said I should use a Quantitative Approach (i.e. based on 
    numbers, money) to obtain concrete support to my selection.

    They said not to worry and start immediately, coached remotely by 
    them via email or Skype, or to follow one of their Seminars, read 
    their Book, BLOG ....

    Riskope International SA © 2009 www.riskope.com


        8
    ISBN: 978-0-9784462-3-9
    Here is the story of how it is done...some details are 
    missing to keep the story short. 
    It is quite simple to get started.. 
    Just realize: for each Alternative, each thing that can go wrong or turn out 
    positive has a certain likelihood of doing so, and if that happens I can make 
    or lose some money. 

    Let's look at some examples of Likelihood:

    A coin has approximately ½ chances of coming out on une side: Likelihood 
    1/2=0.5
    A dice has approximately 1/6 chances of coming out with one specific 
    number: Likelihood 1/6= 0.1667
    The weather forecast tells you the probability of precipitation (POP) 
    tomorrow is 0.9, Likelihood =0.9= 9/10.

    Riskope International SA © 2009 www.riskope.com


        9
    ISBN: 978-0-9784462-3-9
    For any event a likelyhood can be evaluated, or 
    estimated. 
    It is always safe to make an optimistc and a pessimistic evaluation and say 
    that the likelihood will be between so much and that much.

    NB: Likelyhood, by definition cannot be smaller than zero, or larger than one.
    Likelihood One means the event is certain to occur, Likelihood zero (nil) 
    means it will never occur. You should never use zero or one, as there will 
    always be some uncertainty.  

    I was told that I can learn estimation techniques for complex events, 
    allowing me to formulate hi­low estimates. I learned that some guys out 
    there are afraid of doing real estimates, so they use index nubers that end­
    up meaning nothing....and actually will guide them into critical mistakes. 
    Others only use words, at at the end of the day they have a bunch of 
    words, nothing more, available to them to support their decisions.

    Riskope International SA © 2009 www.riskope.com


        10
    ISBN: 978-0-9784462-3-9
    These guys constitute a Hazard...with a likelihood of 
    dropping on Rozy a given volume. The Consequence is: a 
    ruined day, the swimming suit to be washed etc.

    Riskope International SA © 2009 www.riskope.com


        11
    ISBN: 978-0-9784462-3-9
    The next step? Any event can bring in positive or negative
    Examples of tolerability curves.
    consequences (very rarely it can be neutral, meaning its 
    consequence is basically nil)
    To make it simple.. let's consider consequences as money (but could be 
    anything else).

    If your are betting in a game of dice or coins, then the consequence will 
    be what you may win or lose from your bet.
    If you are considering the Alternative of opening a  cafè business 
    downtown vs. bad weather, then you may be looking at an additional 
    profit (because people will spend all day  at your cozy café), or a loss, if 
    no one shows up.

    For any event a consequence can be evaluated, or estimated. It is always 
    safe to make an optimistc and a pessimistic evaluation and say that the 
    consequence will be between so much and that much. Again, techniques 
    exist to solve complex consequence evaluations with non­monetary stuff.
    Riskope International SA © 2009 www.riskope.com
        12
    ISBN: 978-0-9784462-3-9
    Let's put this concept on paper: just remember, a 
    mathematician would probably die of an heart attack right 
    here, because I am making it too simple for you!
    Likelihood
    1.00
    Max Likelihood

    Min Likelihood

    Max   Consequence
    Min   Consequence

    0.00
    Consequence
    Riskope International SA © 2009 www.riskope.com
        13
    ISBN: 978-0-9784462-3-9
    Let's use this information to evaluate the risks of a 
    car accident. Let's start with a “fender bender” scenario

    Likelihood
    1.00
    1/10 per year

    1/30 per year
    1,000$
    200$

    0.00
    Consequence
    Riskope International SA © 2009 www.riskope.com
        14
    ISBN: 978-0-9784462-3-9
    Let's use the same plot to evaluate the risks 
    of  “totalling your car” scenario

    Likelihood
    1.00

    25,000$

    35,000$
    1/80 per year

    1/100 per year

    0.00
    Consequence
    Riskope International SA © 2009 www.riskope.com
        15
    ISBN: 978-0-9784462-3-9
    Let's now build a single plot to display the risks of a 
    car accident scenario from “fender bender” to 
    “totalling your car”
    Likelihood
    1.00
    1/10 per year

    35,000$
    25,000$
    1/30 per year

    1/80 per year
    1,000$
    200$

    1/100 per year

    0.00

    Consequence
    Riskope International SA © 2009 www.riskope.com
        16
    ISBN: 978-0-9784462-3-9
    In real studies a single plot displaying the risks of a 
    complete scenario encompassing small to catastrophic 
    subscenarios is often shown as a “Risk Bubble”
    Likelihood
    1.00
    1/10 per year
    Just remember, a 

    35,000$
    mathematician would 
    probably die of an 
    heart attack right 
    here, because I am 
    making it too simple!
    200$

    1/100 per year
    0.00

    Consequence
    Riskope International SA © 2009 www.riskope.com
        17
    ISBN: 978-0-9784462-3-9
    It's easy to add Reputational Damages to the Risk Bubble 
    if they are converted into monetary value (you lose your job 
    because of drunk driving, for example...)...see the red line.
    Likelihood
    1.00
    1/10 per year

    35,000$
    200$

    1/100 per year
    0.00
    Consequence
    Riskope International SA © 2009 www.riskope.com
        18
    ISBN: 978-0-9784462-3-9
    Those two guys told me they call that red line 
    the “Pinocchio Nose” of the scenario.

    If you are caught lying after an accident (hence the 
    Pinocchio reference), your reputation will be more damaged:
    the more you lie, the longer the nose...easy!

    By the way, small accidents (risks) can have a huge 
    Pinocchio nose...
    if you are unprepared to deal with the crisis that may 
    come  in the aftermath of the accident; when journalist will
    ask you difficult questions in a moment of stress.

    Thus: evaluate your risks and prepare for crises!

    Riskope International SA © 2009 www.riskope.com


        19
    ISBN: 978-0-9784462-3-9
    At the end of the day I had a plot similar to the one below 
    for the first alternative (I have omitted the reputational 
    damages, i.e. the Pinocchio Nose for each bubble.)
    Likelihood
    For each thing that 
    1.00
    can go wrong or 
    make money you will 
    have a bubble in the 
    plot. The 
    mathematician is 
    already dead, so we 
    will not mention him/
    her again...
    0.00

    Consequence
    Riskope International SA © 2009 www.riskope.com
        20
    ISBN: 978-0-9784462-3-9
    The two guys CONGRATULATED me!!! You have just 
    compeleted your first Quantitative Risk Assessment (QRA), 
    for one of the alternatives you have to chose from! 

    They also said:

    You are on a good way to make sensible and transparent 
    decisions.

    Please complete the same procedure for each alternative, 
    and look at the three risk assessment plots (QRAs) once 
    you are done.

    So, I went home and set up for a long night of work...

    Riskope International SA © 2009 www.riskope.com


        21
    ISBN: 978-0-9784462-3-9
    This is what I got next morning. As I was sipping my coffee 
    I could not understad why they had asked me to do all this 
    work...but I was sure they would tell me soon
    Likelihood
    Alternative 1 Risks
    1.00
    Alternative 2 Risks

    Alternative 3 Risks

    0.00

    Consequence
    Riskope International SA © 2009 www.riskope.com
        22
    ISBN: 978-0-9784462-3-9
    Instead of telling me right away, they started asking 
    me questions:

    Mat, are there risks that you can afford (tolerate)?

    Mat, which one of the Alternatives is the riskier?

    Mat, which alternative would you select, now?

    I realized I was not able to reply any of these questions 
    and so, before I committed ritual suicide out of shear 
    despair they said I needed to do one more thing: 

    determine my tolerability to risks! 

    Riskope International SA © 2009 www.riskope.com


        23
    ISBN: 978-0-9784462-3-9
    I had never heard talking about Risk Tolerability before.
    Basically, they said, tolerabiity criteria are different for each 
    person, organization, corporation:

    With three questions it is possible to determine the 
    parameters of the tolerabiity criteria of anyone.

    The questions may be answered in five minutes by an 
    individual, or take a couple days of a facilitated workshop 
    for a corporation, with its FCO and Board present.

    Once it's done, it's a great tool, as it is the key to serious, 
    concrete Entreprise Risk Management and to Risk Based 
    Decision Making/Alternative Selection 

    Riskope International SA © 2009 www.riskope.com


        24
    ISBN: 978-0-9784462-3-9
    I am sure your're diying to see one, right?
    So here it is: from a real QRA! NB: Risk Bubbles are 
    reduced to dots (centre) or vertical lines (to highight min, max 
    Likelihood)
    1

    1/10
    Likelihood

    1/100

    1/1000

    .....

    1 in a 
    Million
    Consequence  in MUS$
    Riskope International SA © 2009 www.riskope.com
        25
    ISBN: 978-0-9784462-3-9
    See the difference below? On the left you've 14 risk scenarios.
    On the right you have the same together with the Tolerability.

    The left plot shows me the risks, but the right one tells me 
    that only seven are critical for this company. Actually it can 
    be shown that only three are really bad!

    Riskope International SA © 2009 www.riskope.com


        26
    ISBN: 978-0-9784462-3-9
    By determining my Tolerability curve and plotting it on top of 
    the Risk Bubbles of each Alternative I can now reply the three
    questions the guys asked me.

    Mat, are there risks that you can afford (tolerate)?

    Mat, which one of the Alternatives is the riskier 
    (including of course upside and downside risks)?

    Mat, which alternative would you select, now?

    Riskope International SA © 2009 www.riskope.com


        27
    ISBN: 978-0-9784462-3-9
    I felt great! Now I was able to select the best alternative for me,
    including postives and negatives of each, my appetite 
    for risk, economic solidity.
    People like Geo Pardy will 
    not scare me away from  
    business or life 
    opportunities!

    I will not end up “bombed” 
    like Rozy Scenario either!

    But, may be more 
    importantly...

    Riskope International SA © 2009 www.riskope.com


        28
    ISBN: 978-0-9784462-3-9
    I will not miss good opportunities like Perryl Shield, 
    or Pitt Fall...I would enjoy my success!

    From NOW ON!

    Riskope International SA © 2009 www.riskope.com


        29
    ISBN: 978-0-9784462-3-9
    What can I accomplish now?
    By using a transparent and sound quantitative
    approach I can:

    Scientifically select the most significant risks,


    Draw attention to the objective highest exposures
    (filtering emotional perceptions), and
    Prioritize them to allow reasonable mitigation in a very
    focused way.

    I can clearly enhance the ability to prioritize risks


    for a rational and sustainable development.
    Riskope International SA © 2009 www.riskope.com
        30
    ISBN: 978-0-9784462-3-9
    BUT, more
    importantly
    Create the basis to
    avoid a slide into
    a crisis, by
    proactively
    controlling the
    situation.
    NB: Long term comparison of
    Alternatives requires the use of more
    sohisticated tools, such as CDA
    (Comparative Decision Analysis in
    replacement to classic NPV

    Riskope International SA © 2009 www.riskope.com


        31
    ISBN: 978-0-9784462-3-9

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