Uncertainty and Risk Analysis: A Practical Guide

A practical guide to uncertainty and risk analysis from Business Dynamics at PricewaterhouseCoopers, written by Chris Rodger and Jason Petch, for costing projects where the inputs are not known with certainty. Sets out the classification of risks by their sensitivity of the output, with boundaries suggested for high, medium and low, high being more than about two per cent of total project cost, and the drafting of risk statements so that they can be quantified. Discusses the quantification of risk from expert opinion, the problems that follow from its subjective nature and the preference for empirical data wherever it exists, and the mechanics of sensitivity analysis, warning that holding a correlated input constant, such as sub-let floor area when testing rent inflation, will overstate or understate the impact. The later chapters treat the presentation of results, decision trees and the utility framework, defining utility as the subjective value a given financial amount carries, so that two options of equal utility imply genuine indifference between them.