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RISK ASSESSMENT AND DECISION MAKING IN BUSINESS AND INDUSTRY:
A PRACTICAL GUIDE
(Second Edition)
by Glenn Koller

Risk Assessment and Decision Making in Business and Industry: A Practical Guide presents
an accessible treatment of the procedures and technologies involved in designing and building
risk assessment processes and models.

Areas examined include:
- brokerage-house portfolio
- management
- legal decision making
- construction
- oil/gas exploration
- environmental assessments
- engineering
- marketing
- government
- manufacturing.

The entire volume is presented as a narrative, keeping statistical jargon to a minimum and
explaining all concepts, techniques, and processes in a straightforward manner.

The author emphasizes that the technical aspects of a risk assessment and decision making
effort are secondary to the cultural, organizational, and interpersonal facets of establishing a
framework.

Risk Assessment and Decision Making in Business and Industry: A Practical Guide enables
its readers who are not risk experts to effect an easy execution of the risk model building
effort.”

In the title of this book is the word "practical.” That term will serve as the guiding principle for
this entire volume. It seems the bulk of books with statistical or risk assessment themes are
written for other people in the field, or to impress those same people. This book is intended to
impress the reader with the facts that:
- You don't need to be a statistical guru or risk assessment expert to use risk assessment in
your decision-making process.
- Risk assessment can be practically applied at any decision-making level and in any
business, educational, or technical arena.
- Risk assessment is a process - not just a set of equations - the success of which mainly
hinges on skillful handling of organizational, educational, communication, and political
aspects of the process. Technical considerations, while important, are secondary.
- Risk assessment can be explained and implemented using plain, understandable terms and
concepts. Nebulous and (almost always) self-serving technical jargon is not necessary and
is, in fact, detrimental.

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WHAT'S NEW IN THE SECOND EDITION:

- Provides guidance for implementation of R/U processes in modern corporations
- Offers a crucial breakthrough by defining the terms "risk" and "uncertainty" in ways that
can be applied in all aspects of science and business
- Explores real-world impediments to process change and implementation
- Addresses R/U from a corporate decision-maker's perspective, detailing how to employ
R/U to set budgets, manage portfolios, value investments, and execute other critical tasks

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"[This book] presents an accessible treatment of the procedures and technologies involved in
designing and building risk-assessment processes and models. … The entire volume is
presented as a narrative, keeping statistical jargon to a minimum and explaining all concepts,
techniques, and processes in a straightforward manner. … This new second edition … offers
a crucial breakthrough by defining the terms 'risk' and 'uncertainty' in ways that can be
applied in all aspects of science and business [and] explores real-world impediments to
process change and implementation." - Continuity Insights

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"This revised edition is almost 40% larger than the first edition. Many of the original 14
chapters have been enhanced with a couple of significant new sections…Statisticians who
are involved with risk analysis will find this book always useful, unabashedly practical,
continually amusing with its informal and folksy (even irreverent) conversational writing
style…Their nonstatistical colleagues on uncertainty evaluation projects will very likely love
the book and will certainly benefit from at least some of the many nuggets of information on
how to have their risk projects end up as successful projects." -Technometrics, Vol. 47, No.
3, August 2005

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COMMENTS ON THE FIRST EDITION:

“To describe [Koller's] approach to risk management as pragmatic is understatement…He
patiently walks you through what risk management is, how it works, and why so many
organizations benefit from it. He introduces only the necessary amount of statistical
building-blocks to help the logic build and is almost apologetic about the occasional reference
to statistics or math. Along the way, it becomes obvious that he has guided you by the hand
from one learning point to another with such subtlety that you arrive at the end of the book in
about half the time you envisioned…

“But the most interesting aspect of Koller's approach is his emphasis on interpersonal
impacts of risk management and the importance of designing processes with an eye toward
organizational dynamics…this book is worth reading because its focus is the bottom line and
it doesn't get lost on the journey. You won't either.” - Marketing NPV

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FEATURES

- Conveys the fundamental principles of risk assessment and enveloping processes
- Considers organizational, political, and human issues
- Defines risk assessment and its implementation without esoteric mathematical/statistical
details
- Includes many real-life examples - explicit, easy-to-understand, practical
- Presents innovative methods for decision making - covering all important elements of a
problem that traditional methods might overlook
- Shows how to build basic as well as advanced risk models.

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CONTENTS

INTRODUCTION
What Companies Really Want to Do
Practical Risk Assessment
You Can Do It

ABOUT RISK AND UNCERTAINTY
Various Views on the Subject - Einstein Was Never Going to Get There
Definitions of Risk and Uncertainty
Two Values - The Expected Value of Success (EVS) and the Expected Value for the Portfolio
(EVP)
Risk Assessment and Risk Management
What Questions Do I Ask and How Do I Integrate the Information?

RISK ASSESSMENT: GENERAL CHARACTERISTICS AND
BENEFITS
Why Risk Assessment?
Common Language
Holistic Thinking
Awareness
Consider Range of Possibilities
Establish Probabilities
Communication with Customers and the Public
Probabilistic Branching
Relationships between Variables
Linking of Disciplines
Checklist - Do Not Take It for Granted
Updating Estimates
To What Types of Problems Can Risk Assessment Be Applied?

RISK ASSESSMENT - A PROCESS
Risk Assessment - The Process
The Time It Takes to Do It Right, and When to Get Started
What Is Typically Done
What Is Not Typically Done
What to Provide
Size Does Not Matter (Not That I Was Worried about That)
Stakeholders

THE PERCEPTION FROM WITHIN - WHY THIS CAN BE SO DARN HARD TO IMPLEMENT
Simple Resistance to Change and Momentum of Old Ways
Learning How the Organization Really Works
Practitioners Who Have Been Doing It for Years Are Difficult to Change - Newcomers Are
Easier to Deal With
Not Invented Here
Instant Access to Executives - If You Are from Outside, You Are Smarter/Better
Turf Wars
Experts Who Are Not
Management That Has Limited Appreciation and the Deterministic Mindset
Coming from the Right Place
Establishing Credibility So You Are Not Just Another Voice in the Wilderness
Time for Preparation of the Organization - Who Benefits?
Ramifications of Implementing a Probabilistic Risk System
For This to Be Effective, Every Part of the Company Must Participate
Not Just One Time - This Must Be Done Over and Over, Like a Diet

CONSISTENCY - THE KEY TO A RISK PROCESS
Biggest Bang from Assessing Multiple Opportunities
Type Consensus Models
Common Measure
Risk Assessment Vision
Sometimes Better to Be Consistent Than to Be Right
Locking the Model
Users Will Game the System - The Risk Police
Databasing Inputs and Outputs
Numbers That Reach Decision Makers
Forums
Language
Risk as a Corporate Function

COMMUNICATION
Communication - Just One Shot
Communication - Why Bother?
Know Your Clients
Focus on Impact and Mitigation
Mitigation Is Not Enough
Killing Projects
Diplomatically Handle Winners and Losers
Communicating the Value of Risk Assessment
It Starts at the Top
Create Success Story Presentation
Web Stuff

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
No Such Thing as a Universal Model
Difficult to Get People's Time to Go Through All This

BUILD 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 the Chickens Problems
CFD-Building Example
Short List of Hints for Building a CFD

EDUCATION - CRITICAL AT THREE LEVELS
Education for Management
Introductory Class for Risk-Model Builders
Advanced Training for Risk-Model Builders
Organizational Attitude and Training Centers
Time Demands and Organization of the Education Effort
Difference between Education and Training

RISK ASSESSMENT TECHNOLOGIES
Different Approaches
Discriminant Function Analysis
Bayesian Analysis
Decision Trees
Factor Analysis
Neural Nets
The Risk Matrix
Risk Registers

MONTE CARLO ANALYSIS
A Bit of History
What Is It Good For?
Simple Monte Carlo Example
Buckets
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?
Distributions - How to Approach Them
Symmetrical Distributions
Skewed Distributions
Spiked Distributions
Flat Distributions
Truncated Distributions
Discrete Distributions
Bimodal Distributions
Reading Data from a File
Peakedness
Triangular Distributions
Specific Distribution Types
Speaking Distributions
Flexibility in the Decision-Making Process

CHANCE OF FAILURE
Chance of Failure - What Is It?
Failure of a Risk Component
Chance of Failure that Does Not Affect an Input Distribution
Incorporating Chance of Failure in a Plot of Cumulative Frequency
Another Reason for Chance of Failure
The Inserting Zeroes Work-Around
Chance of Failure and Multiple Output Variables
A Clear Example of the Impact of Chance of Failure

TIME-SERIES ANALYSIS AND DEPENDENCE
Introduction to Time-Series Analysis and Dependence
Time-Series Analysis - Why?
Time-Series Analysis - How?
Time-Series Analysis - Results
Time-Series Analysis That Is Not
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 Is 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-Weighted Resource (ERWR) Value
The Expected Value of Success (EVS) and the Expected Value for the
Portfolio (EVP)
Risk-Weighted Values - The Answer
Sensitivity Analysis - Why?
Sensitivity Analysis - How?
Sensitivity Analysis - Results

WHAT COMPANIES REALLY WANT TO DO
The Portfolio Effect - Sometimes You Just Do Not Get It
Estimate Budgets
Estimate Project Value - Two Types: The Expected Value of Success
(EVS) and the Expected Value for the Portfolio (EVP)
Ask the Right Questions to Determine the Quality of the Information
Being Conveyed

RISK ASSESSMENT EXAMPLES
Introduction
Qualitative Model
Semi-Quantitative Model
Mini Time-Series Model
Fate-Transport (Process/Health) Model
Decision-Tree Conversion
Legal Model
Comprehensive Risk Assessment Example
EVS/EVP Example

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ABOUT THE AUTHOR

“GLENN KOLLER is supervisor of Amoco Corporation's Risk Center of Excellence. He
received his Ph.D. in geochemistry/geophysics from Syracuse University. Responsibilities of
his current position include implementation of risk assessment and risk management
technologies and processes in Amoco Corporation; development of statistical routines that
comprise Amoco's risk systems; keeping abreast of risk technology developed by vendors,
other companies, and the National Laboratories; marketing risk technology; and performing
technical and consulting services. Areas of responsibility include business and product
development, environmental concerns, ranking and prioritization of projects and products, and
other aspects of Amoco's diversified business. Glenn currently resides in Tulsa, Oklahoma.”

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2005, 352 pages. Order #DR425.
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Risk Management, Business Impact

Rothstein Associates Inc.