The Role of Risk Analysis in Decision Making

The Role of Risk Analysis in Decision Making

Introduction

Project management cannot be implemented without the consideration of inherent risks involved, even if harmless. Particularly at the early stages of a project, risk seems to be ambiguous and problematic due to lack of information and high level of uncertainty. Despite the existence of risk and uncertainty in all the projects that are developed globally, stakeholders cannot stop taking risks or else unique and iconic projects would have never existed. Rothkopf quotes in the Webster’s Third International Dictionary, risk is ‘the possibility of loss, injury, disadvantage or destruction’ (Hertz & Thomas 1983). Referring to this definition, risk can be interpreted as uncertain and indeterminable; therefore the probability of risk must be quantified to measure the likelihood of it occurring. According to Franke, risks can be classified as quantifiable risks in which costs can be determined and qualifiable risks where the cost effects cannot be directly estimated (Franke 1987). There are many different points of view when it comes to risk, and in each case it depends on the type, size and complexity of the project itself. However, there are common types of risks that occur in any project, such as being behind schedule, cost overruns, performance risk, technical risk, force majeure, economical and political risk, organizational risk and many more. In order to analyse the feasibility of a project and whether to proceed with it or not, risk analysis is needed.

Risk analysis is the methodology of quantitatively or qualitatively assessing the probability of an adverse effect for a natural or industrial process, as well as technology or any project associated agent. The term ‘adverse effect’ can have many connotations, being a value judgment. The analysis entails appraising both the uncertainty of the risk and its provisional impact (Molak 1998). Qualitative analyses aim to identify and assess risk,...