The background to risk and uncertainty

Defining risk and uncertainty

When you are a decision-maker you must think from three perspectives:

– of certainty

– of risk

– of uncertainty

You can be certain only when you can specify what will happen, after your decision is taked,  all over the period that is covered by your decision. Seldom, in construction this is happening.

Some writers explains that there are differences between risk and uncertainty, while others tells that there is no difference, even they consider the terms synonymous. In every situation, a decision-maker, takes a decision based on his intuition or rationality, and there is a probability that the risk exists. Exempli gratia, when you must build a construction, from past performance you know how to estimate the time when it can be opened. After this you must take to an end this objective, and also have in consideration the other important objective that is: your profit.

Uncertainty appears where there is no knowing data from the past, maybe because there was no similar projects in your organization, so you can not know what is the perfect time for completion of works, so the investor can be satisfied and your financial resources to.

Life & construction projects

There are many activities involved by the construction projects. Each of them with a cost, time, quality, and problems. But even like life, in construction projects you must understand that there are risks with some costs, and you must accept it not ignore it. So you must identify the risks and uncertainties and structure them in a way that can manage them.

Dynamic vs static

Dynamic risk means maximising opportunities while static risk means to minimising losses. Dynamic risk is risking for the  gain of something uncertain and loss of something certain. Static risk is when everything is relate to potential losses.

A threat and a challenge

„An opportunity is a threat for those who predict failure and a challenge to those who think they might win” Risk management and construction by R. Flanagan and G. Norman.

Some of the basic rules for risk taking

– Don’t risk a lot for a little

– Always plan ahead

– Always analyse both the source and the consequences of risks

– Devise alternative options as a contingency measure

– Don’t use other people as an excuse for inaction

– Don’t take risks purely for reasons of principle

– Don’t take risks to avoid losing face

– Never risk more than you can afford to lose

– Be prepared to seek advice from the experts

– Consider the odds and what your experience and intuition tells you

– Consider the controllable and uncontrollable parts of the risk

Risk – ‘Place your waterline low’

Bill Gore, founder of W L Gore & Associates, makers of Gore-Tex and medical products, had a superb metaphor: „You can try anything, as long as it is above the waterline.”

The risky shift phenomenon – what happens when groups make decisions

It was demonstrated by social scientists that in most cases when a group discuss a risk-taking problem, they usually  arrive at a riskier solution than the average of their own previous individual solution. And this is happening because groups influence decision-making, for a greater number of times, with their positions and multiple conditions like: boldness, conservatism, emotional bond, courage or cowardliness.

The risk of not risking

In The Bible, Mark says: „For he that hath, to him shall be given; for he that hath not, from him shall be taken away even that which he hath.” It is said that if we don’t think big, than soon we will lose our capacity to use this ability. And if we do not try something untried, after this it will be mysterious, so frightening. And if the senses are not used they’ll sooner or later lose their acuity. So if one doesn’t take risks one loses this capacity.

Risk styles

Whereas architects are subjected to a higher risk because they are innovative, design engineers must consider the factor of safety in accordance with stipulated design guidelines.

Three key factors to decision-making

– things we know

– things we think we know

– things we do not know

What can be done when coping with uncertain situations?

– Ignore them

– Seek additional information

– Make more accurate forecasts

– Consciously adjust for bias

– Revise the rate of return by adding a risk premium

– Transfer the risk

– Seek alternative options

Some basic components of decision-making

– The objectives of the decision-maker, ensure they are clear and simple

– The range of choices open

– The factors which must be taken into account

– The possible strategies that could be adopted, having due regard for coping with the uncertainties

– The analytical techniques to be used to aid the decision-maker

– The attitude to risk of the decision-maker

– The consideration of time preferences (short or long term) and the timing of the decision

– The recognition of the bias of the decision-maker and ensuring consistency

Two types of problems

Type A:                                                            Type B:

– simple and analysable                           – complex

– solutions foreseeable                             – solutions unforeseeable

– solutions predictable                             – solutions unpredictable

– A leads to B                                                 – A may or may not lead to B

– occurs routinely                                       – not routine

– similar to a previous project               – resembles nothing done in previous projects

Type A problems rarely occur in construction, most decisions have to be made on type B problems.

Bias and its effects

– Availability : Judgements of probability of easily recalled events are distorted

– Selective perception : Expectations may bias observations of variables relevant to a strategy

– Illusory correlation : Encourages the belief that unrelated variables are correlated

– Conservatism : Failure to sufficiently revise forecasts based on new information

– Law of small numbers : An over estimation of the degree to which small samples are representatives of population

– Wishful thinking : The probability of desired outcomes judged to be inappropriately high

– Illusion of control : Over estimation of the personal control over outcomes

– Logical construction : ‘Logical’ construction of events which cannot be accurately recalled

– Hindsight bias : Over estimation of the predictability of past events

The approach of the efficient decision-maker

– Frame : Surveys the full range of the objectives to be fulfilled and the values implied by choice

– Alternatives : Thoroughly canvasses a wide range of alternative courses of action

– Information : Carefully weight whatever is known about the costs and risks of negative consequences, as well as the positive consequences that could flow from each option. Intensively searches for new information relevant to further evaluation of the options

– Evaluation : Correctly assimilates and takes account of any expert judgement and risk exposure, even when the judgement does not support the course of action initially preferred. Re-examines the positive and negative consequences of all known alternatives , including those originally regarded as unacceptable, before making the final choice

– Implementation : Makes detailed provisions for implementing or executing the chosen course of action, with special attention to contingency plans that might be required if various known risks were to materialise

A logical consistent action which interfere with alternatives we perceive, information that we have and our preferences is a good decision.

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