TeAM YYePG Digitally signed by TeAM YYePG DN: cn=TeAM YYePG, c=US, o=TeAM YYePG, ou=TeAM YYePG, email=yyepg@msn.com Reason: I attest to the accuracy and integrity of this document Date: 2005.05.28 09:53:55 +08'00' Scenario Logic and Probabilistic Management of Risk in Business and Engineering Applied Optimization Volume 93 Series Editors: Panos M Pardalos University of Florida, U.S.A Donald W Hearn University of Florida, U.S.A Scenario Logic and Probabilistic Management of Risk in Business and Engineering by E.D Solojentsev Russian Academy of Sciences, Russia Springer eBook ISBN: Print ISBN: 1-4020-2978-0 1-4020-2977-2 ©2005 Springer Science + Business Media, Inc Print ©2005 Springer Science + Business Media, Inc Boston All rights reserved No part of this eBook may be reproduced or transmitted in any form or by any means, electronic, mechanical, recording, or otherwise, without written consent from the Publisher Created in the United States of America Visit Springer's eBookstore at: and the Springer Global Website Online at: http://ebooks.springerlink.com http://www.springeronline.com AUTHOR SOLOJENTSEV Evgueni Dmitrievich was born in 1939 He is Head of “Intelligent Integrated Automatized Design Systems Laboratory” of Institute of Problems in Mechanical Engineering, Russian Academy of Sciences, Dr of Tech Sci., Professor of St.Petersburg State University of Aerospace Instrumentation, Honored worker of Science of Russian Federation E D Solojentsev graduated Kharkov polytechnic institute in 1960, defended the candidate dissertation in 1967 (Central research diesel engine institute, St.Petersburg) and the doctoral dissertation in 1983 (Institute of Cybernetics of AS, Kiev) From 1967 to 1985 worked as Head of department of Automated System Management in industry (Gorkiy, Sumi) E D Solojentsev is the expert in the area of management of risk at stages of design, test and operation in complex systems E D Solojentsev is the author about 150 scientific papers including books He is the founder of scientific bases of construction the automated debugging test systems He developed the logic and probabilistic risk theory with groups of incompatible events for problems of classification, investment and effectiveness E.D Solojentsev is the Chairman of National Organizing Committee of International Scientific School “Modelling and Analysis of Safety and Risk in complex systems” (St.Petersburg, IPMash RAN, 2001, 2002, 2003) E D Solojentsev Scenario logic and probabilistic management of risk in business and engineering Pages — 391 p., Figures — 70; Tables — 40; Refers — 118 The methodological aspects of the scenario logic and probabilistic (LP) non-success risk management are considered, following from analysis of connections between management and risk, personals and risk, and from study of risk management at stages of design, test and operation of complex systems The theoretical bases of the scenario non-success risk LP-management in business and engineering are stated, including LP-calculus, LPmethods, and LP-theory with groups of incompatible events (GIE) Examples of risk LP-models with logical connections OR, AND, NOT, cycles and GIE are given Methods and algorithms for the scenario risk LP-management in problems of classification, investment and effectiveness are described Risk LP-models and results of numerical investigations for credit risks, risk of frauds, security portfolio risk, risk in quality, accuracy, and risk in multi-state system reliability are given A rather large number of new problems of estimation, analysis and management of risk are considered In some problems the risk LP-models prove to be showed almost two times more accurate and seven times more robustness than other well-known models of risks Software for risk problems based on LP-methods, LP-theory with GIE and cortege algebra, is described too The book is intended for experts and scientists in the area of the risk in business and engineering, in problems of classification, investment and effectiveness, and students and post-graduates Contents Foreword xiii Introduction Acronyms and general notations Chapter MANAGEMENT AND RISK 1.1 History of Interrelation of Management and Risk 1.2 Reasons and consequences of large accidents 1.3 The most dangerous industry branches 1.4 Values of risk and damage 1.5 Sources of accidents depending on humans 1.6 Risk management and insurance 1.7 Monitoring and risk 1.8 State safety program of Russia 1.9 Methods of nonlinear mechanics and probability theory for accidents 1.10 Scenario LP-modelling and management of non-success risk 29 Chapter THE HUMAN BEING AND RISKS 2.1 Frauds in business 2.2 Errors of personnel 2.3 Asymmetric actions of terrorists 2.4 Hackers attacks to informational networks 2.5 Personnel in modern civilization 31 31 32 33 33 33 11 11 15 17 17 18 20 21 22 24 Chapter PRINCIPLES OF RISK MANAGEMENT IN 39 DESIGN 39 3.1 Style, concepts and methods of designers 42 3.2 General scientific knowledge in the area of risk 43 3.3 Models and rules 44 3.4 Occam’s razor 45 3.5 Physical approach 46 3.6 Scheme of complex object management viii Contents 3.7 Minimization of the number of decisions 3.8 Structural design 3.9 Concept of the acceptable risk 3.10 Markowitz’s and VaR-approach to investment risk 3.11 Active and passive management of risk 3.12 Algorithmic calculations 3.13 Arithmetical and logical addition Chapter RISK MANAGEMENT AT DEBUGGING TESTS 4.1 Definition of debugging tests 4.2 Analysis of debugging process 4.3 Management of debugging process 4.4 Technology of debugging tests 4.5 Non-success risk scenarios of debugging 4.6 Structural and LP-models of debugging non-success risk 4.7 Complexity of debugging 4.8 Development of the debugging program 4.9 Risk management in operating tests 48 50 52 54 57 60 61 65 65 67 70 72 73 78 79 84 87 Chapter RISK MANAGEMENT IN OPERATION ON BASIS OF MONITORING 95 5.1 Destruction, wearing and deterioration of equipments in operation 95 5.2 Monitoring in engineering 96 5.3 Monitoring of infrastructure of rocket launcher 98 5.3.1 Scenarios of accident appearance 98 5.3.2 System of monitoring 103 Chapter RISK MANAGEMENT ON DANGEROUS PLANT 107 107 6.1 Difficult problems 109 6.2 Management of risk 109 6.2.1 Period of safe wearing of resource 6.2.2 Risk systematization and classification of problems 111 6.2.3 The use of risk computation results in exploitation 122 123 6.2.4 Principles of work organization for risk decrease 125 6.3 Financing of the risk management process 129 6.4 Reliability regulation of engineering and a person Conclusion 377 Let us present a list of application of the risk LP-theory for risk estimation and analysis, following the works submitted to the First, Second and Third International Scientific Schools “Modelling and analysis of safety and risk in complex systems” (June 18–22 2001, July 2–5 2002, and August 20–23 2003 in St.Petersburg, IPME, RAS), [115–118] and the papers [2,4,7,14,15,42,54,69] In the area of economy and finance, there are the following applications of the risk LP-theory: Credit risks; Analysis of bank credit activity; Security portfolio risk; Risk in problems of efficiency; Modelling of bribes; Swindle risk of managers; Fraud risk with investments; Management of state and development of the company (bank) by risk criterion; Non-success risk in struggle of companies for profitable orders; Non-success risk at financing building projects with reservation; Estimation and management of bank personnel; Risk of rent business; Risk of loss of quality and market; Risk of insurance; Risk analysis in money and commodity markets (Technical Analysis) In the area of engineering and ecology, there are the following applications of the risk LP-theory: Risk of explosion in a submarine; Risk estimation of car accidents on the crossroads without traffic lights; Non-success risk of debugging and operational tests of complex objects; Risk of the man injury by electrical current in a room; 378 E.D.Solojentsev Safety on the railway; Explosion risk of a artillery warehouse; Accident risk in an intrinsically dangerous room; Drowning risk for a submarine; Risk analysis of the ship power station; Explosion and fire safety of gas and oil transmitting stations; Risk modelling of three-channel system of nuclear station safety; Economic safety of a defense enterprize; Operation safety of the ground-based space structure; Risk insurance at realization of space activity; Analysis of technogenic safety; Safety estimation of the divergence of trajectory of ships; Risk monitoring in functioning systems of the rocket starting complex; Risk modelling and estimation on nuclear-dangerous plants; Risk modelling and analysis in power systems; Safety management of the nuclear reactor; Risk of resource prolongation of worn power equipments The applications list of the non-success risk LP-theory confirms that the risk LP-theory is attractive for engineers and economists The examples of use of the non-success risk LP-models in business showed the efficiency of LP-models in sense of accuracy and robustness, opportunities of risk analysis and risk management The examples of the use of the non-success risk LP-theory in engineering showed the high efficiency concerning opportunities of estimation of failure risk or accident and revealing weaker elements in the system, for which it is necessary to increase reliability by allocating resources in the first place Comparison of features and similarities of the non-success risk LPtheory with other methods of risk estimations and object classifications and also the above review of applications of this theory in economy, engineering and business allow us to speak about creation of the new scientific direction in the theory and practice of risks We name the direction the scenario logic and probabilistic management of the nonsuccess risk in complex systems Bibliography [1] Ryabinin I.A.,Reliability of Engineering Systems 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index ABC of scenario risk management, admitted losses, 322 admitted risk, 215, 322 analysis of non-success risk, 202, 257, 324 contributions in risk, 257, 264 forecasting possible unpleasantness, 70, 76, 89 grade-event, 296 logic risk model, 163, 257, 335, 338, 341 number of grades, 257 probabilistic risk model, 163, 257, 335, 338, 341 sign-event, 296, 363 structural non-success risk model, 214, 335 Algebra Boolean, 133, 285, 290 of corteges, 285 of logic, 53, 101, 133, 173, 184, 188, 204, 210, 279, 283 Algorithmic computation of element risk characteristics, 264 object risk characteristics, 264 risk model characteristics, 233, 264 risk model optimization criterions, 224, 238 system risk characteristics, 264 Analysis of risk, combinatorial, 258 logical and probabilistic, 257 statistical, 257 Bayes formula in risks, 216, 217 Characteristics of element risk contribution, 264 importance, 162 weight, 158 Characteristics of object risk price for risk, 215 Characteristics of system risk admitted damage, 318 admitted risk, 215 mean damage, 318 mean risk, 321 Construction of risk logical functions, combinatorics, 258, 263, 274 minimal cut of prevention of dangerous, 154 minimal path of success, 154 scheme of functional integrity, 14, 167, 279, 313 Construction of risk probabilistic functions, identification, 224 non-linear optimization, 218, 226 orthogonalisation of risk logical function, 155 Contributions of sign-events and gradeevents, 257, 264, 318, 322 Criterion of credit risk LP-models, accuracy, 253 errors of classification, 224 probabilities of grade-events, 224 robustness, 254 Criterion of the portfolio risk LPmodel maximal admitted risk, 39, 98, 390 E D Solojentsev 99, 224, 273, 324 minimal admitted yield, 57, 318, 322, 323, 329 number of portfolio conditions in “tail”, 327 relative parts of securities, 318 Criterion of the risk LP-models in reliability problems group weights, 157 importance, 162 risk as probability, 155 weight, 157 Diagram of management of complex object, 46, 71, 308 Distribution laws of variables, analytical, 316 non-parametric, 320, 363 normal, 316 Logical operations and rules, conjunction, 134, 138 denial, 135 differences, 226 disjunction, 61, 136 rules, 135, 136 LP risk theory with GIE, credit risk, 191, 296 frauds in business, 300, 303, 305 multi-state system reliability, 361 portfolio risk, 319 LP-theory with groups of incompatible events, 191 Events, derivative, 336, 339 fictitious, 314 grade-events, 196, 210, 263, 362 independent, 319, 324 initiating, 53, 134, 204, 335 sign-events, 242, 263, 301 Methods of optimization random search, 227 small increments, 227 Models of risk, associative, 191, 205, 211 logical, 168, 171, 178, 179 non-associative, 30, 102, 204, 210, 285 probabilistic, 39, 65, 329, 355 structural, 66, 67, 78, 81, 102, 281, 309, 355, 360 General knowledge in risk, 42 Occam’s razor, 44, 45 Identification of risk LP-model, parametric, 224, 226, 227, 245 structural, 202, 299, 324 Portfolio theory, LP-VaR, 315, 334 Markowitz, 55 VaR, 54, 57 Logic and probabilistic risk theory, LP risk theory with GIE, 57 LP-calculus, 133 LP-methods, 151 Logical functions, DNF, 140, 141, 154, 301, 320, 343 GIE, 14, 30, 191, 319, 330 ODNF, 141, 343 PDNF, 140, 320 Quantization of distributions, step of quantization, 329 Risk and, insurance, 114, 124 management, 11 monitoring, 95 personal, 31 Subject index 391 Risk LP-models in economics, bribes, 300 credits, 265, 295, 297, 300 efficiency problems, 353 fraud of manager, 303 fraud with investigation, 305 non-success of companies, 313 security portfolio, 12, 54, 285, 309 Risk LP-models in engineering, explosion in rooms, 335, 340 guality, 353 multi-state system reliability, 343, 361 railway catastrophe, 169, 174 sinking ship, 163 Risk management of nuclear reactor, 344, 345 Risk management principles, active management, 116 Bernoulli’s approach, 110 Columb’s approach, 110 passive management, 20, 117, 126 Scenario management of risk in, debugging test, 65 designing, 39 operating, 60, 95 operating test, 92 Scenarios of non-success risk, 29, 30, 39, 65, 66, 74, 88, 95, 163, 296, 300, 303, 305, 311, 313 Shannon’s risk entropy, 228 Software for risk, cortege algebra, 284 LP-methods, 278, 280 LP-theory with GIE, 271 Typical structural risk models, bridge, 214 station, 341 unit, 214 Weyl theorem on numbers, 323 ... of safety and risk in economics and engineering For many years the author worked in industry in the field of designing and testing of complex engineering systems Now he works in an academic institute,... Solojentsev Scenario logic and probabilistic management of risk in business and engineering Pages — 391 p., Figures — 70; Tables — 40; Refers — 118 The methodological aspects of the scenario logic and probabilistic. .. of the risk LP-models is described In Chapters 15–18 applications of risk LP-models in business and engineering are given In Chapter 15 examples of application of risk LP-models in business and