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Sandra is the Project Manager
in a small software company
Once her team is small, all
members always work on a
single project at a time
Today, Sandra has a problem
to solve
She has to choose one
between two projects
candidates:
Customers
Helpdesk
Which project will
bring more return to
the organization?
But and if we
consider risks?
Probability of
occurrence of
the risk
x
Estimated value
of the risk
Calculating the expected monetary value
of each risk...
Expected
Monetary
Value (EMV)
of the risk
=
Monetary value of
the impact
of the risk
Positive = opportunity
Negative = threat
Probability of
occurrence of
the risk
x
Estimated value
of the risk
Expected
Monetary
Value (EMV)
of the risk
=
Customers = $40.000,00
Helpdesk = $45.000,00
How to interpret?
Is it what we
will earn from
each project?
NO
If each project were executed many
times, in the very same conditions…
Probable average return
of each execution
Customers = $40.000,00
Helpdesk = $45.000,00
How to interpret?
It helps to estimate
Contingency reserves
Customers = $40.000,00
Helpdesk = $45.000,00
How to interpret?
More used in larger projects (large number
of risks)
The difficulty is in
appropriately quantify
the value of the impact
But there is
no magic!
Limitations…
– Definition of the value of the impact can be
subjective or biased
– Decision should consider the variance
– Large variation between earns and losses can
affect decision makers
Limitations…
(DAVIES & LAM, 2001)
– Will you accept a 50/50 bet for $5?
Probably YES
– Will you accept a 50/50 bet for $5m?
Probably NO
– BUT BOTH HAVE AN EMV = 0!
– In some way you ‘care’ more about losing
$5m than winning $5m
Limitations…
(DAVIES & LAM, 2001)
– Your house is worth $200,000
– The probability of destruction by fire is
1/10,000
– EMV of the loss = $20
– So $20 is the most you will pay for
insurance?
– NO, YOU CARE MORE ABOUT THE CHANCE OF
LOSING YOUR HOUSE
Risk #1: The software designer will be transferred to other
project.
• Probability = 30%
• Substitution cost = $12,000.00 (threat, negative impact)
• EMV = 0.3 x 12,000.00 = $-3,600.00
Revisiting...
Project XPTO
Total cost: $300,000.00
Risk #2: New approved legislation.
• Probability = 50%
• Modification cost = $20,000.00 (threat, negative impact)
• EMV = 0.5 x 20,000.00 = $-10,000.00
Revisiting...
Project XPTO
Total cost: $300,000.00
Revisiting...
Risk #3: Current version of the framework already attends the
project.
• Probability = 60%
• Work reduction = $5,000.00 (opportunity, positive impact)
• EMV = 0.6 x 5,000.00 = $+3,000.00
Project XPTO
Total cost: $300,000.00
Take also a look at…
(DAVIES & LAM, 2001). Managerial Economics: An Analysis of Business Issues. 3rd ed. FT Prentice-
Hall.
(HAIMES, 2015). Risk Modeling, Assessment, and Management. 4th ed. Wiley.
(KENDRICK, 2015). Identifying and Managing Project Risk: Essential Tools for Failure-Proofing
Your Project. 3rd ed. AMACOM.
(PMBOK, 2013). A Guide to the Project Management Body of Knowledge (PMBOK® Guide). 5th ed.
Project Management Institute (PMI).
(TALEB, 2010). The Black Swan: The Impact of the Highly Improbable Fragility. 2nd ed. Random
House.
