Risk Analysis Decision making under risk and uncertainty Department of Civil and Environmental Engineering Massachusetts Institute of Technology PHÂN TÍCH RỦI RO RA QUYẾT ĐỊNH DƯỚI MÔI TRƯỜNG RỦI RO VÀ KHÔNG CHẮC CHẮN Risk and Uncertainty Risk Preferences, Attitude and Premiums Examples of simple decision trees Decision trees for analysis Flexibility and real options
1.040/1.401 Project Management Spring 2006 Risk Analysis Decision making under risk and uncertainty PHÂN TÍCH RỦI RO- RA QUYẾT ĐỊNH DƯỚI MÔI TRƯỜNG RỦI RO VÀ KHÔNG CHẮC CHẮN Nguồn Department of Civil and Environmental Engineering Massachusetts Institute of Technology Project Management Phase FEASIBILITY DESIGN PLANNING DEVELOPMENT CLOSEOUT Financing&Evaluation Risk Analysis&Attitude Phân tích rủi ro Thái độ OPERATIONS Risk Management Phase FEASIBILITY DESIGN PLANNING DEVELOPMENT CLOSEOUT OPERATIONS RISK MNG Risk management (guest seminar 1st wk April) Assessment, tracking and control Tools: Risk Hierarchical modeling: Risk breakdown structures Risk matrixes Contingency plan: preventive measures, corrective actions, risk budget, etc Decision Making Under Risk Outline Risk and Uncertainty Risk Preferences, Attitude and Premiums Examples of simple decision trees Decision trees for analysis Flexibility and real options Decision making Uncertainty and Risk “risk” as uncertainty about a consequence Preliminary questions What sort of risks are there and who bears them in project management? What practical ways people use to cope with these risks? Why is it that some people are willing to take on risks that others shun? Some Risks Weather changes Different productivity (Sub)contractors are Unreliable Lack capacity to work Lack availability to work Unscrupulous Financially unstable Late materials delivery Lawsuits Labor difficulties Unexpected manufacturing costs Failure to find sufficient tenants Community opposition Infighting & acrimonious relationships Unrealistically low bid Late stage design changes Late Unexpected subsurface conditions Soil type Groundwater Unexpected Obstacles Settlement of adjacent structures High lifecycle costs Permitting problems … Importance of Risk Much time in construction management is spent focusing on risks Many practices in construction are driven by risk Bonding requirements Insurance Licensing Contract structure General conditions Payment Terms Delivery Method Selection mechanism Outline Risk and Uncertainty Risk Preferences, Attitude and Premiums Examples of simple decision trees Decision trees for analysis Flexibility and real options Decision making under risk Available Techniques Decision modeling Decision making under uncertainty Tool: Decision tree Strategic thinking and problem solving: Dynamic modeling (end of course) Fault trees Decision Making Under Risk Risk and Uncertainty Risk Preferences, Attitude and Premiums Decision trees for representing uncertainty Examples of simple decision trees Decision trees for analysis Flexibility and real options Flexibility and Real Options Flexibility is providing additional choices Flexibility typically has Value by acting as a way to lessen the negative impacts of uncertainty Cost Delaying decision Extra time Cost to pay for extra “fat” to allow for flexibility Ways to Ensure of Flexibility in Construction Alternative Delivery Clear spanning (to allow movable walls) Extra utility conduits (electricity, phone,…) Larger footings & columns Broader foundation Alternative heating/electrical Contingent plans for Value engineering Geotechnical conditions Procurement strategy Additional elevator Larger electrical panels Property for expansion Sequential construction Wiring to rooms Illustration of Flexibility Illustration of Flexibility: Selection of Elevator Count More sophisticated model taking into account Initial costs Repair costs Loss due to lost conveyance Sensitivity Analysis Outcome Strategy Selection Adaptive Strategies An adaptive strategy is one that changes the course of action based on what is observed – i.e one that has flexibility Rather than planning statically up front, explicitly plan to adapt as events unfold Typically we delay a decision into the future Real Options Real Options theory provides a means of estimating financial value of flexibility Key insight: NPV does not work well with uncertain costs/revenues E.g option to abandon a plant, expand bldg E.g difficult to model option of abandoning invest Model events using stochastic diff equations Numerical or analytic solutions decision-tree based framework Can derive from decision Example: Structural Form Flexibility Considerations Tradeoffs Short term speed and flexibility Short Short term cost and flexibility Short Overlapping design & construction and different construction activities limits changes E.g value engineering away flexibility Selection of low bidder Late decisions can mean greater costs NB: both budget & schedule may ultimately be better off w/greater flexibility! Frequently retrofitting $ > upup-front $ Decision Making Under Risk Risk and Uncertainty Risk Preferences, Attitude and Premiums Decision trees for representing uncertainty Examples of simple decision trees Decision trees for analysis Flexibility and real options Readings Required More information: Utility and risk attitude – Stellar Readings section Get prepared for next class: You can manage construction risks – Stellar On On line textbook, from 2.4 to 2.12 Recommended: Meredith Textbook, Chapter Prj Organization Risk management and insurances – Stellar Risk - MIT libraries Haimes, Risk modeling, assessment, and management Mun, Applied risk analysis : moving beyond uncertainty Flyvbjerg, MegaMega-projects and risk Chapman, Managing project risk and uncertainty : a constructively simple approach to decision making Bedford, Probabilistic risk analysis: foundations and methods … and a lot more!