The Failure of Risk Management, 2nd Edition

CHAPTER 4Getting Started: A Simple Straw Man Quantitative Model

Build a little. Test a little. Learn a lot.

—REAR ADMIRAL WAYNE MEYER, AEGIS WEAPON SYSTEM PROGRAM MANAGER

In the next several chapters I will be reviewing what the research says about the performance of popular qualitative methods and certain quantitative, probabilistic methods. Some readers may be a lot more familiar with the former methods and will need at least some kind of reference for the latter. Some may want to start experimenting with a simple quantitative model even before hearing the details about the relative performance of various methods. In either case, it makes sense to introduce a very simple quantitative model early.

Or perhaps some readers may have misconceptions about what qualifies as a quantitative method and may prematurely dismiss them as infeasibly complex requiring a PhD in statistics or actuarial science or requiring unrealistic amounts of data. Nothing could be further from the truth. There is a whole spectrum of quantitative solutions from the very simple to very complex. The concern that anything quantitative must be unmanageable in practice is just another issue we need to address early.

My team at HDR once created quantitative decision models for infrastructure investments in a power utility. They had previously developed their own version of the risk matrix briefly described in chapter 2, and there was resistance to adopting more quantitative models. One concern they had is that ...