Risk management
Uncertainty, tradeoffs and decision-making

Overview

Once hazards have been identified, their possible consequences assessed and the level of risk has been quantified, the decision-making phase of risk management begins. This seeks to answer the questions What can be done and which options are available? What are the associated tradeoffs?

Risk management involves:

• Strategic choices concerning the organization’s (or society’s) risk appetite, and the tradeoffs that people are willing to make between benefits resulting from the hazardous activity and its possible negative consequences. These choices will depend on how risks are perceived and the level of risk aversion.

• Arbitrating between different classes of positive and negative dimensions of risk (costs and benefits related to employment, environmental impacts, profits, health and safety impacts), using decision-support tools such as benefit-cost analysis.

• Prioritization of safety investments based on key performance indicators and results of safety audits.

• Ensuring that action plans for process safety, occupational safety, physical security, information security, enterprise risks and project risks do not lead to conflicting priorities and actions.

• Decisions on the level of residual risk that is acceptable, in the presence of aleatory and epistemic uncertainty, and the various risk indicators, monitoring and control activities to put in place throughout a project lifecycle, together with escalation procedures.

• Communication and consultation to ensure that early warnings of emerging risks are detected, that stakeholders’ perceptions of the decision impacts are known to decision-makers, and that decisions made are understood.

To be effective, risk management must be tightly linked to the overall management of a system. These activities are at the frontier between the organizational responsibilities of risk engineers, risk managers and top management. We focus in this module on a technical approach to these activities; a managerial viewpoint on these topics can be found in most MBA programmes.

Course material

• The economic approach to risk treatment decisions

• Risk metrics, or how to measure risk and safety

• Risk perception

• Risk acceptability and tolerability

• The ISO 31000 standard on risk management

• Risk regulation, liability and insurance

• Uncertainty in risk analysis, including techniques for uncertainty representation

• Black swans, or the limits of statistical modelling

• Benefit-cost analysis

• Sensitivity analysis

• Learning from incidents and accidents

• Barriers to learning from experience