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

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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The Project Management Problem

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The Project Management Problem

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.

Monte Carlo Simulations

Input Parameters Output Parameters

Calculation

Engine

Critical PathScheduling

Engine

(

)

Task durationcost, finish time,etc.

cost, finish time,etc.

Project duration

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

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.

Two Approaches for Defining Uncertainties

• Distribution-based approach • Event-based approach

Which Distribution Should Be Used?

Normal Triangual Uniform

Also useful:

• Lognornal

• Beta

Distribution Fitting

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.

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.

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.

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%.

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.

Probability Wheel

25% No delay of activity

35% 3 day delay of activity

40% 5 day delay of activity

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

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?

How Many Trials Are Required?

Huge number of trials (> 1000) usually does not increase accuracy of analysis

• Incorporate rare events • Use convergence monitoring

What Is The Chance That a Project Will Be on Time And Within Budget?

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

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

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

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

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.

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

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

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

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.

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

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)

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