Content area
Full Text
ABSTRACT:
As practiced in today's varied applications, traditional risk management is typically defined as a process to identify, analyze, mitigate, and control the risks and opportunities in decision-making. Although such actions move the ball, they do little to carry the decision-maker over the goal line. There are two additional requirements of risk management: benchmarking and grading. Incorporation of these two attributes into traditional risk management practice produces a much-improved decision technology, value-based risk management (VBRM). Value-based risk management and VBRM are service marks of Decision Sciences Corporation, Saint Louis, Missouri. The management action chart, uncertainty benchmark horn, and uncertainty grading material included in this article are copyrighted by the Decision Sciences Corporation. They are used with permission for this article.
KEY WORDS: Value-based risk management, uncertainty, mitigation and decision-making
The terms risk and uncertainty suffer from multiple definitions. For example, uncertainty may be defined as a state wherein there is an absence of knowledge while, in the same definitional set, risk is described in both unfavorable and favorable terms (e.g., upside risk denotes a favorable situation).
Such definitions are antithetical in many areas of business practice, most notably in applications that measure cost, profit, and schedule type variables. Many managers and engineers look upon risk as a wholly unfavorable entity, something from which no good can result. This interpretation is dramatically evident in risky business decision-making, a vigorous exercise to avoid, remove, or reduce the attendant risks in that decision and -this is equally important-take full advantage of its inherent opportunities (the managerial term for upside risks).
Since risk is considered nothing but unfavorable in many business decisions, risk may be defined as an unwanted and undesirable outcome consistent with the relationship uncertainty = risks + opportunities. (This is one of the three acceptable definitions specified in AACE International's Risk Management Dictionary and the applicable definition throughout the remainder of this article.)
In accordance with this definition, risk management is understood to mean risk and opportunity management and risk analysis as risk and opportunity analysis. (Some practitioners argue that risk management is a misnomer and that the process should be referred to as uncertainty management).
As practiced in today's varied applications, traditional risk management is typically defined as a process to identify, analyze, mitigate,...