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Risk Event Modeling
Risk event modeling in part of Intaver Institute’s presentations on project risk
management and risk analysis
Intaver Institute Inc.303, 6707, Elbow Drive S.W, Calgary, AB, CanadaTel: +1(403)692-2252Fax: +1(403)459-4533www.intaver.com
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The Project Management Problem
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Many projects are unsuccessful! Many projects are unsuccessful!
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The Project Management Problem
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The Project Management Problem
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04/20/23 2009 Intaver Institute 5
The Project Management Problem
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04/20/23 2009 Intaver Institute 6
The Project Management Problem
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Benefits
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Risk Event Modeling Workflow
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Risk Definition
• Risks– Risks are “events” that have a probability of occurring during a project– Risks are identified and assigned to tasks or resources – Define impact of risks by assigning:
• Chance of occurrence• Outcome (e.g. delay, increase in cost)• Result (percentage or fixed value of outcome)
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What is Monte Carlo
Monte Carlo simulation is a mathematical method used in risk analysis. Monte Carlo simulations are used to approximate the distribution of potential results based on probabilistic inputs.
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Monte Carlo Simulations
Input Parameters Output Parameters
Calculation
Engine
Critical PathScheduling
Engine
(
)
Task durationcost, finish time,etc.
cost, finish time,etc.
Project duration
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Monte Carlo Schedule Analysis
4 5 6321 7 7 82 3 654 1 4 5 632 7
8 9 10 11 12 13 14 15 16
1
2
3
4
5
6
7
Task 1
Task 2Task 3
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Two Approaches to Estimating Probabilities
• The relative frequency approach, where probability equals the number of occurrences of specific outcome (or event) divided by the total number of possible outcomes.
• The subjective approach represents an expert’s degree of belief that a particular outcome will occur.
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Two Approaches for Defining Uncertainties
• Distribution-based approach • Event-based approach
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Which Distribution Should Be Used?
Normal Triangual Uniform
Also useful:
• Lognornal
• Beta
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Distribution Fitting
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Before Eliciting Judgment You Need to Have:
• A clearly defined problem• An identified list of risks, or a risk breakdown
structure, for the project• A project schedule• A clearly defined set of questions you will ask
experts
In addition, your team of experts should be aware of any personal interest that expert may have regarding particular issues. It helps to mitigate motivational biases.
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Psychological Factors
• Availability heuristic: people judge the probability of the occurrence of events by how easily these events are brought to mind.
• Anchoring heuristic: refers to the human tendency to remain close to the initial estimate.
• Wishful thinking: when we overestimate the probabilities of opportunities and underestimate the probabilities of risks.
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Overestimating the Probability of Compound Events
If the probability of a defect in a component is 20% and the device uses three redundant components, the probability of the defective device will be (0.2 * 0.2 * 0.2) = 0.008%.
People tend to think this number is much higher.
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Ignoring Base-Rate Frequencies
• Historically, the probability that a particular component will be defective is 1%.
• The component is tested before installation. • The test showed that the component is defective. • The test usually successfully identifies defective
components 80% of the time. • What is the probability that a component is
defective?
The correct answer is close to 4%, however, most people would think that answer is a little bit lower than 80%.
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Eliciting Judgment About Probabilities of Single Events
• Pose a direct question: “What is the probability that the project will be canceled due to budgetary problems?”
• Ask the experts two opposing questions: (1) “What is the probability that the project will be canceled?” and (2) “What is the probability the project will be completed?” The sum of these two assessments should be 100%.
• Break compound events into simple events and review them separately.
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Probability Wheel
25% No delay of activity
35% 3 day delay of activity
40% 5 day delay of activity
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Task Duration
4
8
12
16
20 100%
80%
60%
40%
20%
Fre
quen
c y
Pro
babi
lity
2 3 4 5 6
(days)
Question: What is the chance that durationis less than 3 days?
Eliciting Judgment: Probability Method
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Eliciting Judgment: Method of Relative Heights
Task Duration
2
4
6
8
10
2 3 4 5 6
50%
40%
30%
20%
10%F
req u
ency
Pro
b abi
li ty
(days)
Question: How many times the durationwill be between 2 and 3 days?
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How Many Trials Are Required?
Huge number of trials (> 1000) usually does not increase accuracy of analysis
• Incorporate rare events • Use convergence monitoring
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What Is The Chance That a Project Will Be on Time And Within Budget?
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Analysis of Monte Carlo Results
• Sensitivity and Correlations • Critical Indices • Crucial tasks• Critical Risks• Probabilistic Calendars • Deadlines • Conditional Branching • Probabilistic Branching • Chance of Task Existence
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Analyze Results
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Result Gant
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When you have project schedule and risk breakdown structure ready click here to perform Monte Carlo simulations
When you have project schedule and risk breakdown structure ready click here to perform Monte Carlo simulations
RiskyProject employs convergence monitoring to ensure fast calculation
RiskyProject employs convergence monitoring to ensure fast calculation
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Risk Register
Pre-mitigation Probability, Impact,And Score
Pre-mitigation Probability, Impact,And Score
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Result Gantt Chart
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White bars represent original project
schedule (no risks)
White bars represent original project
schedule (no risks)
Blue bars represent project schedule with
risks
Blue bars represent project schedule with
risks
Because of risks, project duration significantly increased
Because of risks, project duration significantly increased
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Results of Risk Analysis
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Project Summary: project duration,
cost, and finish time with and without
risks
Project Summary: project duration,
cost, and finish time with and without
risks
Results of analysis for project cost, finish time, and
duration
Results of analysis for project cost, finish time, and
duration
Double click on any chart to view detailed informationDouble click on any chart to view detailed information
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Detailed Results of Analysis
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Move the slider to determine the chance that project will be within
budget
Move the slider to determine the chance that project will be within
budget
Get detailed statistical dataGet detailed statistical data
Data can be exported as an image or text
Data can be exported as an image or text
Detailed results can be shown for each tasks or whole project for cost, duration, start time, finish time, and income.
Detailed results can be shown for each tasks or whole project for cost, duration, start time, finish time, and income.
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Sensitivity
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Tornado chart shows risks or other parameters have the most
affect on the project schedule
Tornado chart shows risks or other parameters have the most
affect on the project schedule
Top critical risks need to be mitigated firstTop critical risks need to be mitigated first
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Crucial Tasks
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Crucial tasks have the most affect on the project schedule
Crucial tasks have the most affect on the project schedule
Crucial tasks for project cost and duration can be different
Crucial tasks for project cost and duration can be different
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Success Rate
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A task can be canceled if it reaches a task or a project deadline or if it is affected by risk with a “Cancel task” outcome.
Success rate is calculated based on number of times the task is not
canceled
Success rate is calculated based on number of times the task is not
canceled
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Risk Chart
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Risk chart show risks, associated with task versus duration or cost
This task has low duration but high
risk
This task has low duration but high
riskThese tasks have
balanced risk versus duration ratio.
These tasks have balanced risk versus
duration ratio.
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Risk Matrix
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Risk matrix shows probability/impact on 5x5 matrix
Double-click on a risk to view risk
assignments
Double-click on a risk to view risk
assignments
Risk Probability, Impact and Score for the current schedule
Risk Probability, Impact and Score for the current schedule
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Risk Planning
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Modeling risk mitigation efforts •Risk handling strategies
•Transfer•Mitigate•Eliminate•Ignore
•Risk mitigation efforts represent their own costs etc. which must be accounted for•Create multiple baselines that model pre and post mitigation risk handling efforts•View results of risk handling efforts •Select project alternative based on criteria (cost, duration, start and finish time, success rate)
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Future Reading
Lev Virine and Michael Trumper
Project Decisions:
The Art and Science
Management Concepts, Vienna, VA, 2007
Lev Virine and Michael Trumper
Project Think:Why Good Managers Make Poor Project Choices
Gower, 2013