Risk Analysis

The risk of using risk matrices.

The risk matrix (RM) is a widely espoused approach to assess and analyze risks in the oil & gas (O&G) industry. RMs have been implemented throughout that industry and are extensively used in risk-management contexts. This is evidenced by numerous SPE papers documenting RMs as the primary risk management tool. Yet, despite this extensive use, the key question remains to be addressed: Does the use of RMs guide us to make optimal (or even better) risk-management decisions? We have reviewed 30 SPE papers as well as several risk-management standards that illustrate and discuss the use of RMs in a variety of risk-management contexts, including HSE, financial, and inspection. These papers promote the use of RMs as a "best practice.?? Unfortunately, they do not discuss alternative methods or the pros and cons of using RMs. The perceived benefit of the RM is its intuitive appeal and simplicity. RMs are supposedly easy to construct, easy to explain, and easy to score. They even might appear authoritative and intellectually rigorous. Yet, the development of RMs has taken place completely isolated from academic research in decision making and risk management.

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What's wrong with risk matrices

Risk matrices-tables mapping "frequency" and "severity" ratings to corresponding risk priority levels-are popular in applications as diverse as terrorism risk analysis, highway construction project management, office building risk analysis, climate change risk management, and enterprise risk management (ERM). National and international standards (e.g., Military Standard 882C and AS/NZS 4360:1999) have stimulated adoption of risk matrices by many organizations and risk consultants. However, little research rigorously validates their performance in actually improving risk management decisions. This article examines some mathematical properties of risk matrices and shows that they have the following limitations. (a) Poor Resolution. Typical risk matrices can correctly and unambiguously compare only a small fraction (e.g., less than 10%) of randomly selected pairs of hazards. They can assign identical ratings to quantitatively very different risks ("range compression"). (b) Errors. Risk matrices can mistakenly assign higher qualitative ratings to quantitatively smaller risks. For risks with negatively correlated frequencies and severities, they can be "worse than useless,"

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You can find the graphics and excerpts from my latest book, the Security Risk Management Aide-Mémoire (SRMAM), at . I read a lot and share the more interesting articles, books, or ideas You'll also find some of my other sites at this FYI.TO SmartList.

Thinking, Fast & Slow by Daniel Kahneman

How to Measure Anything: Finding the Value of Intangibles in Business by Douglas Hubbard

This insightful and eloquent book will show you how to measure those things in your own business, government agency or other organization that, until now, you may have considered "immeasurable," including customer satisfaction, organizational flexibility, technology risk, and technology ROI.

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What's in a number? Risk matrices and how we are being misled - CGE Risk Management Solutions

Guest blog by Emily Harbottle from HarbottleHughes I was asked the other day what advantage a 5×5 risk matrix has over a 4×5 and it started me thinking. A risk matrix is meant to help categorize, prioritize and compare risks, so what difference do 5 or 4 rows or columns really make? I assumed it […]

'Five' Insights in Risk Management

Links to references and further reading on some insights to modern risk management. I suggest you start with the video presentation. (NB. I've used affiliate links for the Amazon links).

What's wrong with risk matrices?

Risk matrices-tables mapping frequency and severity ratings to corresponding risk priority levels-are popular in applications as diverse as terrorism risk analysis, highway construction project management, office building risk analysis, climate change risk management, and enterprise risk management

Julian Talbot

Somehow I've collected more websites over the years than I expected. This FYI.to Smartlist is the one website to rule them all.

What's right with risk matrices?

For good reason, risk matrices appear in risk management guides and reference books. Despite much criticism, they are used by many organizations, and in the rig

'Five' Insights in Risk Management

Links to references and further reading on some insights to modern risk management. I suggest you start with the video presentation. (NB. I've used affiliate links for the Amazon links).

Julian Talbot - Gaining Funding for Startups & Risk Management Expert - Clarity

Julian has 35 years international security risk management experience up to and Including Director level and C-Suite experience in the commercial, government, and not-for-profit sectors in Australia and internationally. His credentials include a Master of Risk Management (MRiskMgt), Graduate of the Australian Institute of Company Directors (GAICD), Australian Security Medal (ASM), Certified Protection Professional (CPP), Diploma of Security Risk Management, Diploma of Project Management, Microsoft Certified Systems Engineer, Fellow of the Risk Management Institution of Australasia (RMIA), and Fellow of the Institute of Strategic Risk Management (F.ISRM). He is also lead author of the Security Risk Management Body of Knowledge.

Julian Talbot - Gaining Funding for Startups & Risk Management Expert - Clarity

Julian has 35 years international security risk management experience up to and Including Director level and C-Suite experience in the commercial, government, and not-for-profit sectors in Australia and internationally. His credentials include a Master of Risk Management (MRiskMgt), Graduate of the Australian Institute of Company Directors (GAICD), Australian Security Medal (ASM), Certified Protection Professional (CPP), Diploma of Security Risk Management, Diploma of Project Management, Microsoft Certified Systems Engineer, Fellow of the Risk Management Institution of Australasia (RMIA), and Fellow of the Institute of Strategic Risk Management (F.ISRM). He is also lead author of the Security Risk Management Body of Knowledge.