An Approach to Risk Management

1
An Approach to Risk Management

• W.E. Kastenberg
• University of California at Berkeley
• Lecture 4

2
Risk Management

• Decision making under risk.
• Dealing with the natural variability and
  stochastic nature of the world (aleatory
  uncertainty).
• Decision making under uncertainty.
• Dealing with gaps in our knowledge of the world
  (epistemic uncertainty).
• Decision making under complexity.
• Dealing with indeterminacy, ambiguity, emergence
  and self-organization.

3
A Risk Based Decision
D

• Alternatives Insuring a laptop computer
• S self-insure
• L limited warranty
• E extended warranty
• Outcomes costs (risk)
• S success
• F failure
• What is the value?
• Influence diagram

C
V
V
C
D
4
Risk Based Decision Tree
52
L
20
20
0
0.99 S
D
S
C
0.01 F
2000
E
100
- Read the tree from left to right, i.e. P
0.99 (50) 0.01 (200) 52
5
Uncertainty Based Decision Tree
L
R3
p2
D
S
C
1-p2
R4
E
-In this case the risks (Ri) and the
probabilities (pi) are uncertain
6
Uncertainty Distributions
3.00
16.50
30.00
43.50
57.00
Uniform
Normal
0.00
0.25
0.50
0.75
1.00
Log-Normal
Triangular
7
Monte Carlo Methods for Treating Uncertainty

• Values are chosen at random from each
  distribution to run the model, resulting in a
  distribution of the outputs

8
Decision Based on Utility
Utility
Value
1
0.4
0
L
Actual Value
0.951
48
0.574
S
D
0.323
E
0.569
0.628
40
0.4 S
C
0.6 R
0.667
50
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Elements of Risk Analysis

• Characterizing risk should be a decision driven
  activity, directed at informing choices and
  solving problems.
• Managing risk requires a broad understanding of
  the relevant consequences and impacts.
• Risk characterization is the outcome of an
  analytic-deliberative process.
• Rationality assumption is context dependent

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Decision-driven Activity

• How does technology create axiological dissonance
  within society?
• In order to answer this question, we require
  answers to questions such as
• What is an acceptable risk?
• How do we choose among options for reducing an
  unacceptable risk?

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Broad Understanding of Risk

• Research to expand the paradigm of risk
  characterization from reductionism to holism.
• Consideration of both the undesirable (factual)
  consequences and the unintended (axiological)
  impacts.
• Discovery of emergent properties or qualities of
  complex systems.
• Inclusion of qualitative as well as quantitative
  consequences and impacts.

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Analytic-deliberative Process

• Epistemological dialogueexperts consider factual
  assessment.
• Reflective dialoguepolicy makers, scientists and
  stake-holders consider risk management.
• Participatory dialogueinclusion of public
  citizens and focused on societal values and
  ethical considerations.
• Dialogueallowing the emergence of possibilities
  that were unthinkable prior to the dialogue.