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Weight of numbers Risk managers looking to better understand and use quantitative risk analysis can take advantage of a new IRM training initiative with partnering organisation Real Options Valuation BY PROFESSOR DR JOHNATHAN MUN
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usinesses have been dealing with risk since the beginning of the history of commerce. In most cases, managers have looked at the risks of a particular project, acknowledged their existence and moved on. Little quantification was performed in the past. In fact, most decisionmakers look only to single-point estimates of a project’s profitability, cost, time to completion, revenues and so on. Risk should be an important part of the decisionmaking process; without an assessment of risk, bad decisions may be made. For instance, if projects are chosen based simply on an evaluation of returns, then clearly the highest-return project will be chosen over lower-return projects. In financial theory, projects with higher returns will, in most cases, bear higher risks. Therefore, instead of relying purely on bottom-line profits, a project should be evaluated based on its risks as well as its returns. IRM has teamed up with Real Options Valuation, Inc., a software, training and consulting firm located in Silicon Valley, California, to introduce and train analysts and decision-makers in the Integrated Risk Management framework. This framework comprises eight distinct phases of a successful and comprehensive risk analysis implementation, starting from a qualitative management screening process proceeding to quantitative risk-based
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Instead of relying purely on bottomline profits, a project should be evaluated based on its risks as well as its returns
Enterprise Risk
