Risk Modeling for Determining Value and Decision Making: 1st Edition (Hardback) book cover

Risk Modeling for Determining Value and Decision Making

1st Edition

By Glenn Koller

Chapman and Hall/CRC

336 pages

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Hardback: 9781584881674
pub: 2000-05-17
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Description

Risk or uncertainty assessments are used as aids to decision making in nearly every aspect of business, education, and government. As a follow-up to the author's bestselling Risk Assessment and Decision Making in Business and Industry: A Practical Guide, Risk Modeling for Determining Value and Decision Making presents comprehensive examples of risk/uncertainty analyses from a broad range of applications.

Decision/option selection Manufacturing

Environmental assessment Pricing

Identification of business drivers Production sharing

Insurance Scheduling and optimization

Investing Security

Law

Emphasizing value as the focus of risk assessment, this book offers discussions on how to make decisions using each risk model and what insights the model can provide. The presentation of each model also includes computer code that encapsulates its logic and direction on how to apply the model to other types of problems.

The author devotes a chapter to techniques for consistently collecting data in an inconsistent world and offers another chapter on how to reflect the effect of "soft" issues in the value of an opportunity. The book's final chapters delineate the techniques and technologies used to perform risk/uncertainty analyses, including sections on distribution, Monte Carlo process, dependence, sensitivity analysis, time series analysis, and chance of failure.

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Reviews

"This book makes for some interesting reading and is notable for addressing important nontechnical issues related to modeling risk…it provides insight into the way in which some nontechnical people think, thus offering a potential for better communication with business-oriented clients."

- Technometrics, May 2001

"This book is based on the original work of the author, who is a well-known specialist in the field of decision and risk analysis. …The narration of the issues of concern referring to making decisions is excellent and gives the proper atmosphere of a proper discussion to address decisions of large investments or important topics. …the overall practical experience of the author adds value… The book is important. It brings to the potential reader a challenging way of looking into the decision-making process by using direct approaches …The advantage of the book is that it addresses the decision -making process in a direct and simple manner, following patterns given by the author in the contributing-factor diagram… I f one is serious about using the knowledge of decision analysis in one's practical, everyday work, this book is worth the price…this book is worth reading and, to the extent possible, integrating in various tasks for solving decision problems facing a corporation or a person."

-JASA, September 2001

"An instructor should consider this book for class use, because it gives a direct approach to the decision-making process, uncertainty, and risk estimation and how to interpret such knowledge in assessing and determining the values of potential alternatives, which are not always explicitly expressed by managers, stakeholders, or decision makers."

-JASA, September 2001

Table of Contents

INTRODUCTION

Scope Realism

Models, Validation, and Precision

Value

TWO APPROACHES TO SOLVING DECISION TREES-A CLASS-ACTION SUIT EXAMPLE

Introduction

Building the Decision Tree

What is the Question?

Interpretation of the Probabilistic-Branching Model

So, So What?

TERRORISM RISK MODELS-RELATIVE AND ABSOLUTE RISK

Terrorism Relative-Risk Model

What is the Question?

Building the Contributing-Factor Diagram for the Relative-Ranking Terrorist-Threat Risk Model

Category Weights

Relative-Risk Model Equations

Relative-Risk Model Applied to Terrorist Organization #1

Relative Risk Model Results from Evaluation of Terrorist Organization #1

Relative-Risk Model Applied to Terrorist Organization #2

Relative-Risk Model Results from Evaluation of Terrorist Organization #2

Comparison of the Two Terrorist Organizations

Building the Terrorism Absolute-Cost Risk Model

Absolute-Cost Risk Model Equations

Application of the Absolute-Cost Risk Model to Terrorist Organization #2

Absolute-Cost Risk Model Results for Evaluation of Terrorist Organization #2

So, So What?

GATHERING INFORMATION CONSISTENTLY IN AN INCONSISTENT WORLD

Introduction

The Problem

The Solution

So, So What?

NEW MANUFACTURING FACILITY- BUSINESS-JUSTIFICATION MODEL

Introduction

What is the Question?

Construction of the Contributing-Factor Diagram

Populating the Model with Data

Risk Model Equations

Results from Model Execution

So, So What?

OIL-FIELD-DEVELOPMENT INVESTMENT-OPPORTUNITY RISK MODEL

Introduction

What is the Question?

Categories and Variables

Field-Development Risk Model Equations

Populating the Model with Data

Results from Model Execution

So, So What?

USING CHANCE OF FAILURE AND RISK-WEIGHTED VALUES TO REFLECT THE EFFECT OF "SOFT" ISSUES ON THE VALUE OF AN OPPORTUNITY

Introduction

Accurate Estimates of Value are Essential

Types of Chance of Failure

How to Express and use Chance of Failure

Risk-Weighted Values and the Value of a Portfolio Element

Value of a Portfolio Composed of Dissimilar Elements

So, So What?

PRODUCTION-SHARING AGREEMENT RISK MODEL

Introduction

What is the Question?

Building the Contributing-Factor Diagram

Risk Model Equations

Populating the Model with Technical Data

Chances of Abject Failure

Populating the Model with Financial Data

Results from the Model

So, So What?

SCHEDULING AND OPTIMIZATION RISK MODEL

Introduction

The Problem

Design of the Model and the Contributing-factor Diagram

The Risk Model Code

Results from Model Execution

So, So What?

DECISION/OPTION-SELECTION RISK MODEL

Introduction

The Current Situation

The Problem

Results from Model Execution

So, So What?

RISK PROCESS TO IDENTIFY BUSINESS DRIVERS, MAXIMIZE VALUE, AND DETERMINE THE VALUE OF POTENTIAL EXPENDITURES

Introduction

The Problem

The Risk/Uncertainty Model

Populating the Model with Data

Results from Model Execution

Determining Business Drivers and Maximizing Value

Determining the Value of New Information/Services

So, So What?

SUMMARY

Other Applications

It is Mostly the Process - Not the Technology

Accomplishment of Vision Generates Real Returns

Exploration Example

Maintenance/Construction Example

BUILDING A CONSENSUS MODEL

What is the Question? - Most of the Time and Effort

Consensus Model

Group Dynamics

Write it Down

Sort it Out

Group Dynamics Again

Units

Overarching Categories

BUILDING A CONTRIBUTING-FACTOR DIAGRAM

The Contributing-Factor Diagram - Getting Started

Identify and Define Variables

Ask the Right Question

Double-Dipping

Double-Dipping and Counting the Chickens

Fixing the Double-Dipping and Counting of Chickens Problem

CFD-Building Example

Short List of Hints for Building a CFD

MONTE CARLO ANALYSIS

A Bit of History

For What is it Good?

Simple Monte Carlo Example

How Many Random Comparisons are Enough?

Output from Monte Carlo Analysis - The Frequency and Cumulative Frequency Plots

Interpreting Cumulative Frequency Plots

Combining Monte Carlo-Output Curves

DECISIONS AND DISTRIBUTIONS

Decisions

Just what is a Distribution?

Distribution - How to Approach Them

Symmetrical Distributions

Skewed Distribution

Spike Distributions

Flat Distributions

Truncated Distributions

Discrete Distributions

Bimodal Distributions

Reading Data from a File

Peakedness

"Specific" Distribution Types

CHANCE OF FAILURE

Chance of Failue - What it It?

Failure of a Risk Component

Chance of Failure that does no affect and Input Distribution

Incorporating chance of Failure in a Plot of Cumulative Frequency

Another Reason for chance of Failure

The "Inserting 0s Work Around"

COF and Multiple Output Variables

TIME SERIES ANALYSIS AND DEPENDENCE

Introduction to Time-Series Analysis and Dependence

Time-Series Analysis - Why?

Time-Series Analysis - How?

Time-Series Analysis -Results

Some Things to Consider

Dependence - What is It?

Independent and Dependent Variables

Degree of Dependence

Multiple Dependencies and Circular Dependence

Effect of Dependence on Monte Carlo Output

Dependence - It's Ubiquitous

RISK-WEIGHTED VALUES AND SENSITIVITY ANALYSIS

Introduction to Risk-Weighted Values and Sensitivity Analysis

Risk-Weighted Values - Why?

Risk-Weighted Values - How?

The Net Risk-Weighted Value

The Economic Risk-Weighed Resource (ERWR) Value

Risk-Weighted Values - The Answer

Sensitivity Analysis - Why?

Sensitivity Analysis - How?

Sensitivity Analysis - Results

Subject Categories

BISAC Subject Codes/Headings:
BUS027000
BUSINESS & ECONOMICS / Finance
MAT029000
MATHEMATICS / Probability & Statistics / General
TEC020000
TECHNOLOGY & ENGINEERING / Manufacturing