Primary Author: Dr David T. Hulett
Audience Focus: Intermediate
Application Type: Application
Venue: 2013 AACE International Annual Meeting, Washington, DC, USA
Abstract: A large part of the risk management process involves looking into the future, trying to understand what might happen and whether it matters. An important quantitative technique which has been neglected in recent years – decision trees – is enjoying something of a revival. Decision trees help organizations choose between alternative courses of action, for instance project management strategies, when the results of such actions are uncertain.
The decision tree technique can be applied to many different uncertain situations. For example:
- Should we use the low-price bidder when delivery and quality uncertain?
- Should we adopt a state-of-the-art technology if we may not know how to do this?
This paper looks at two different approaches to making the decision:
- Maximize expected monetary value, which is a hallmark of a risk-neutral organization
- Maximize expected utility, which is the appropriate measure of merit for a risk-averse or even a risk-seeking organization
This paper describes these two approaches and compares their results using simple decision models.
Audience Focus: Intermediate
Application Type: Application
Venue: 2013 AACE International Annual Meeting, Washington, DC, USA
Abstract: A large part of the risk management process involves looking into the future, trying to understand what might happen and whether it matters. An important quantitative technique which has been neglected in recent years – decision trees – is enjoying something of a revival. Decision trees help organizations choose between alternative courses of action, for instance project management strategies, when the results of such actions are uncertain.
The decision tree technique can be applied to many different uncertain situations. For example:
- Should we use the low-price bidder when delivery and quality uncertain?
- Should we adopt a state-of-the-art technology if we may not know how to do this?
This paper looks at two different approaches to making the decision:
- Maximize expected monetary value, which is a hallmark of a risk-neutral organization
- Maximize expected utility, which is the appropriate measure of merit for a risk-averse or even a risk-seeking organization
This paper describes these two approaches and compares their results using simple decision models.