![]() ![]() ![]() Starting with a realistic list can make a huge difference in effective risk management. ![]() This results in a much more robust and complete list of project risks than a perfunctory brainstorming session conducted with team members in the final stages of planning, when everyone is anxious to stop planning and start working. They ask about worst cases and what might go wrong or interfere with the deliverables, schedules, budgets, and other components of their project documentation, listing all exposures and uncertainties encountered during project analysis and planning, without regard to how likely or unlikely they may appear at the time. As project information accumulates, good project leaders explore assumptions and planned work for what is missing, incomplete, or otherwise not adequately understood. Key Challenges to Risk Probability Estimating Listing Significant Risksĭeveloping a good sense of project risk, including realistic probability estimates, starts with a robust list of project “uncertainties that matter.” Making risks and potential problems visible is most effective when the risk identification process is integrated into the processes of project definition and planning. Dealing better with risk begins with understanding why probability estimates are so often wrong. Ignoring risks does not remove them from a project it converts them from potentially controllable project aspects into potentially rude, sometimes disastrous, surprises. Even those that are listed may be disregarded or marginalized during assessment because of their assumed minuscule likelihood. “Unlikely” Risks Tend to be Overlookedīecause the probabilities estimated for many project risks are inaccurately low, many potentially significant risks may be excluded from a risk register because they appear too unlikely to worry about. And while this can cause problems in many areas of life, it can be especially dangerous for projects. (This is well covered in Peter Bernstein's excellent review of the history of risk, Against the Gods.) Today, despite the fact our theoretical understanding of statistics and probability has evolved significantly, most people are still bad at assessing probabilities, as evidenced by the many lost “bar bets” and questionable decisions we make. From the times of the Greek philosophers well into the Renaissance, people assumed that the odds in gambling and other situations involving chance were controlled “by the gods” and therefore beyond our comprehension. For most of human history, we did not even bother to study them. Because people lack much intuition about probabilities, we do not understand them well. Probability is abstract, and even more problematic. ![]() Most project managers will readily admit to a lack of expertise, even when estimating concrete quantities such as duration, effort, or money. The Problem Estimating is HardĪll estimating is difficult. The paper builds on concepts outlined in Kendrick's Identifying and Managing Project Risk, Second Edition (AMACOM, 2009, recipient of the 2010 PMI Cleland Literature Award). It also discusses how to use better probability estimates to assess overall project risk, and how to use ideas such as ROI simulation and “Value at Risk” (VaR) to validate project financial assumptions. This paper explores barriers to probability estimation and describes a process for determining and refining estimates. Because probability estimates are often so underestimated, many significant risks may be overlooked.Įstimating risk probabilities more realistically results in improved risk management, lower overall stress, and more successful projects (to say nothing of earlier intervention to adjust or abandon project concepts that are prone to failure). Estimating probabilities tends to be the more difficult of these two, for a number of reasons. Project risk assessment relies on estimates of both risk impact (consequences) and risk probability (likelihood). ![]()
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