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Principles of Risk Analysis
Decision Making Under Uncertainty
Second Edition
Principles of Risk Analysis
Decision Making Under Uncertainty
Second Edition
Charles Yoe
CRC Press
Taylor & Francis Group
6000 Broken Sound Parkway NW, Suite 300
Boca Raton, FL 33487-2742
© 2019 by Taylor & Francis Group, LLC

CRC Press is an imprint of Taylor & Francis Group, an Informa business
No claim to original U.S. Government works
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International Standard Book Number-13: 978-1-138-47820-6 (Hardback)
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Library of Congress Cataloging-in-Publication Data
Names: Yoe, Charles E., author.

Title: Principles of risk analysis : decision making under uncertainty / Charles Yoe.
Description: Second edition. | Boca Raton : Taylor and Francis, CRC Press, 2019. |
Includes bibliographical references.
Identifiers: LCCN 2018044466| ISBN 9781138478206 (hardback : alk. paper) |
ISBN 9780429667619 (PDF) | ISBN 9780429664892 (ePub) | ISBN 9780429662171
(Mobi/Kindle)
Subjects: LCSH: Decision making. | Risk assessment.
Classification: LCC T57.95 .Y63 2019 | DDC 658.15/5--dc23
LC record available at https://lccn.loc.gov/2018044466
Visit the Taylor & Francis Web site at

http://www.taylorandfrancis.com
and the CRC Press Web site at
http://www.crcpress.com
In loving memory of Jason Charles Yoe
Contents
Preface...................................................................................................................xxix
About the Author...................................................................................................xxxi
Chapter 1 The Basics............................................................................................. 1

1.1 What is Risk?.............................................................................. 1
1.2 How Do We Identify a Risk?...................................................... 4
1.2.1 Trigger.........................................................................4
1.2.2 Hazard or Opportunity................................................5
1.2.3 Consequence................................................................5
1.2.4 Sequence of Events...................................................... 6
1.2.5 Uncertainty.................................................................. 6
1.3 What is Risk Analysis?...............................................................6
1.3.1 Risk Management........................................................ 9
1.3.2 Risk Assessment........................................................ 10
1.3.3 Risk Communication................................................. 10
1.3.4 Risk Semantics.......................................................... 11
1.4 Why Do Risk Analysis?........................................................... 11
1.5 Who Does Risk Analysis?........................................................ 12
1.5.1 A Brief Historical Perspective on Risk Analysis...... 12
1.5.2 Government Agencies............................................... 17
1.5.3 Private Sector............................................................ 19
1.6 When Should We Do Risk Analysis?.......................................20
1.7 Organization of Book............................................................... 22
1.8 Summary and Look Forward...................................................25
References...........................................................................................26
Chapter 2 Uncertainty.......................................................................................... 27
2.1 Introduction.............................................................................. 27
2.2 Uncertainty from 75,000 Feet.................................................. 29
2.3 The Uncertainty on Your Desk................................................. 32
2.3.1 Knowledge Uncertainty or Natural Variability?....... 33
2.3.2 Types of Uncertainty................................................. 35
2.3.3 Quantity Uncertainty................................................. 36
2.3.3.1 Empirical Quantities................................ 38
2.3.3.2 Defined Constants.................................... 38
2.3.3.3 Decision Variables................................... 39
2.3.3.4 Value Parameters..................................... 39
2.3.3.5 Index Variables........................................ 39
2.3.3.6 Model Domain Parameters......................40
2.3.3.7 Outcome Criteria......................................40
vii
viii Contents
2.3.4 Sources of Uncertainty in Empirical Quantities.......40

2.3.4.1 Random Error and Statistical
Variation...................................................40
2.3.4.2 Systematic Error and Subjective
Judgment.................................................. 41
2.3.4.3 Linguistic Imprecision............................. 41
2.3.4.4 Natural Variability................................... 42
2.3.4.5 Randomness and Unpredictability........... 42
2.3.4.6 Disagreement........................................... 42
2.3.4.7 Approximation......................................... 42
2.4 Being Intentional about Uncertainty........................................ 43
References...........................................................................................46
Chapter 3 Risk Management................................................................................ 47

3.1 Introduction.............................................................................. 47
3.2 Identifying Risks...................................................................... 49
3.2.1 Problem Recognition................................................. 50
3.2.2 Problem Acceptance.................................................. 51
3.2.3 Problem Definition.................................................... 52
3.2.4 From Problems and Opportunities to Risks.............. 53
3.3 Risk Estimation........................................................................ 53
3.3.1 Establish a Risk Analysis Process............................. 55
3.3.2 Individual Risk Management Activities.................... 56
3.3.2.1 Develop a Risk Profile.............................. 56
3.3.2.2 Establish Risk Management Objectives..... 58
3.3.2.3 Decide the Need for a Risk Assessment.....61
3.3.2.4 Request Information Needed................... 62
3.3.2.5 Initiate the Risk Assessment....................66
3.3.2.6 Consider the Results of the Risk
Assessment............................................... 67
3.4 Risk Evaluation......................................................................... 68
3.4.1 Principles for Establishing Acceptable and
Tolerable Levels of Risk............................................ 70
3.4.1.1 Policy........................................................ 71
3.4.1.2 Zero Risk.................................................. 71
3.4.1.3 Weight of Evidence.................................. 72
3.4.1.4 Precautionary Principle............................ 72
3.4.1.5 ALARA Principle.................................... 73
3.4.1.6 Appropriate Level of Protection.............. 73
3.4.1.7 Reasonable Relationship.......................... 74
3.4.1.8 Safety and Balancing Standards.............. 74
3.4.2 The Decision............................................................. 75
3.5 Risk Control............................................................................. 76
3.5.1 Formulating Risk Management Options................... 76
Contents ix
3.5.2 Evaluating Risk Management Options...................... 79

3.5.2.1 Comparison Methods............................... 81
3.5.3 Comparing Risk Management Options..................... 82
3.5.3.1 Multicriteria Decision Analysis............... 83
3.5.4 Making a Decision.................................................... 85
3.5.5 Identifying Decision Outcomes................................. 87
3.5.6 Implementing the Decision....................................... 88
3.6 Risk Monitoring....................................................................... 89
3.6.1 Monitoring................................................................. 89
3.6.2 Evaluation and Iteration............................................ 91
3.7 Risk Communication................................................................92
3.8 Risk Management Models........................................................92
References...........................................................................................97
Chapter 4 Risk Assessment..................................................................................99

4.1 Introduction..............................................................................99
4.2 What Makes a Good Risk Assessment?................................. 100
4.3 Risk Assessment Defined....................................................... 104
4.4 Risk Assessment Activities.................................................... 107
4.4.1 Understand the Questions....................................... 109
4.4.2 Identify the Source of the Risk............................... 111
4.4.3 Consequence Assessment........................................ 112
4.4.3.1 Dose-Response Relationships................ 113
4.4.4 Likelihood Assessment........................................... 114
4.4.4.1 Exposure Assessment............................. 115
4.4.5 Risk Characterization.............................................. 119
4.4.6 Assess Effectiveness of Risk Management Options....119
4.4.7 Communicate Uncertainty...................................... 121
4.4.8 Document the Process............................................. 123
4.5 Risk Assessment Models........................................................ 124
4.6 Risk Assessment Methods...................................................... 129
4.6.1 Qualitative Risk Assessment................................... 130
4.6.2 Quantitative Risk Assessment................................. 130
4.7 Summary and Look Forward................................................. 131
References......................................................................................... 131
Chapter 5 Risk Communication......................................................................... 133

5.1 Introduction............................................................................ 133
5.2 Definitions.............................................................................. 137
5.3 Internal Risk Communication................................................ 138
5.3.1 Coordination between Assessors and Managers..... 138
5.3.2 Risk Communication Process................................. 140
5.3.3 Documenting the Process........................................ 140
x Contents
5.4 External Risk Communication............................................... 140

5.4.1 Risk and Crisis Communication............................. 142
5.4.1.1 Risk Dimensions.................................... 142
5.4.1.2 Risk Perceptions..................................... 144
5.4.1.3 Know and Engage Your Audience......... 145
5.4.1.4 Psychographic Information.................... 148
5.4.1.5 Risk, Stress, and the Communication
Model..................................................... 151
5.4.1.6 Three M’s of Risk Communication....... 153
5.4.1.7 Critical Differences in Crisis
Communication...................................... 156
5.4.1.8 Explaining Risk to Nonexperts.............. 157
5.4.1.9 Explaining Uncertainty.......................... 161
5.4.2 Public Involvement.................................................. 163
5.4.2.1 Planning Stakeholder Involvement........ 164
5.4.3 Conflict Resolution.................................................. 167
References......................................................................................... 169
Chapter 6 Enterprise Risk Management............................................................ 173

6.1 Introduction............................................................................ 173
6.2 What is Enterprise Risk Management?.................................. 173
6.3 History.................................................................................... 175
6.4 Trends in ERM....................................................................... 178
6.4.1 Global Business Risks............................................. 178
6.4.2 The Financial Sector............................................... 180
6.4.3 The State of Enterprise Risk Management............. 181
6.5 Enterprise Risk Management for Dummies........................... 183
6.6 Risk Management Standards and Guidance.......................... 185
6.7 ISO 31000:2018 Risk Management—Guidelines................... 187
6.7.1 ISO 31000:2018 Principles...................................... 187
6.7.2 ISO 31000:2018 Framework.................................... 189
6.7.3 ISO 31000:2018 Risk Management Process............ 191
6.8 COSO’s Enterprise Risk Management Integrated
Framework.............................................................................. 195
6.8.1 Across the Enterprise.............................................. 196
6.8.2 Achievement of Objectives...................................... 197
6.8.3 Components of COSO’s ERM Framework............. 197
6.9 Three Enterprise Risk Management Concepts....................... 199
6.9.1 Risk Profile..............................................................200
6.9.2 Risk Appetite...........................................................200
6.9.3 Risk Tolerance.........................................................202
6.10 Summary and Look Forward.................................................204
References.........................................................................................205
Contents xi
Chapter 7 Problem Identification for Risk Management...................................207

7.1 Introduction............................................................................207
7.2 What’s a Problem? What’s an Opportunity?.......................... 211
7.3 Becoming Aware of Problems and Opportunities.................. 214
7.3.1 Triggers and Inputs.................................................. 214
7.4 Framing the Problem.............................................................. 217
7.5 Problem and Opportunity Identification Techniques............. 219
7.5.1 Risk Identification................................................... 221
7.5.2 Problem Definition Process..................................... 221
7.5.3 Appreciation............................................................ 222
7.5.4 Be a Reporter........................................................... 222
7.5.5 Utopia...................................................................... 223
7.5.6 Benchmarking......................................................... 223
7.5.7 Checklists................................................................224
7.5.8 Inverse Brainstorming.............................................224
7.5.9 Bitching................................................................... 225
7.5.10 Draw a Picture of the Problem................................ 225
7.5.11 Mind Maps.............................................................. 225
7.5.12 Why-Why Diagram................................................. 227
7.5.13 Restatement............................................................. 227
7.6 The P&O Statement................................................................ 229
7.7 Two Problem Solving Traits................................................... 231
References......................................................................................... 233
Chapter 8 Brainstorming................................................................................... 235

8.1 Introduction............................................................................ 235
8.2 What Can You Brainstorm?.................................................... 236
8.3 Background............................................................................. 236
8.3.1 No Evaluation.......................................................... 236
8.3.2 Unusual Ideas.......................................................... 236
8.3.3 Quantity Counts...................................................... 237
8.3.4 Combine and Improve Ideas.................................... 237
8.3.5 Four Pitfalls............................................................. 237
8.4 Avoid Problems in Your Process............................................ 239
8.5 A Few Good Techniques........................................................240
8.5.1 Brainstorming......................................................... 241
8.5.2 Brainwriting............................................................ 242
8.5.2.1 Poolwriting............................................. 242
8.5.2.2 Gallery Writing...................................... 243
8.5.2.3 Electronic Brainwriting.......................... 243
8.6 3× Yeah..................................................................................244
8.7 Group Evaluations with Colored Dots....................................246
xii Contents
8.8 Do You Need a Facilitator?.................................................... 247

8.9 Addendum..............................................................................248
References......................................................................................... 250
Chapter 9 Economics of Risk Management....................................................... 251

9.1 Introduction............................................................................ 251
9.2 Economics for Risk Managers............................................... 251
9.3 Economics and Decision Making........................................... 252
9.3.1 Scarcity.................................................................... 252
9.3.2 Trade-Offs............................................................... 253
9.3.3 Opportunity Cost..................................................... 254
9.3.4 Marginal Analysis................................................... 256
9.3.5 Incentives................................................................. 259
9.3.6 Rent Seeking...........................................................260
9.4 Economic Basis for Interactions among People..................... 261
9.4.1 Trade........................................................................ 261
9.4.2 Markets.................................................................... 261
9.4.3 Market Failure......................................................... 262
9.4.4 Government Failure.................................................264
9.5 Principles of the Economy as a Whole...................................264
9.5.1 Living Standards and Productivity..........................264
9.5.2 Inflation and Unemployment................................... 265
9.6 Making Trade-Offs................................................................. 265
9.7 Economic Analysis................................................................. 267
9.7.1 Cost-Effectiveness Analysis.................................... 268
9.7.2 Incremental Cost Analysis...................................... 268
9.7.3 Benefit-Cost Analysis.............................................. 269
9.7.4 Risk-Benefit Analysis.............................................. 270
9.7.5 Economic Impact Analysis..................................... 270
References......................................................................................... 271
Chapter 10 Risk Assessor’s Toolbox.................................................................... 273

10.1 Introduction............................................................................ 273
10.2 Brainstorming......................................................................... 274
10.2.1 Overview of the Technique..................................... 274
10.2.2 How the Technique Is Used..................................... 274
10.2.3 Inputs....................................................................... 275
10.2.4 Process..................................................................... 275
10.2.5 Outputs.................................................................... 275
10.2.6 Strengths and Weaknesses...................................... 275
10.2.7 Examples of Use...................................................... 276
Contents xiii
10.3 Bayesian Statistics and Bayes Nets......................................... 276

10.3.3 Inputs....................................................................... 277
10.3.4 Process..................................................................... 277
10.3.5 Outputs.................................................................... 279
10.3.7 Examples of Use......................................................280
10.4 Bow Tie Analysis...................................................................280
10.4.1 Overview of the Technique.....................................280
10.4.2 How the Technique Is Used.....................................280
10.4.3 Inputs....................................................................... 281
10.4.4 Process..................................................................... 281
10.4.5 Outputs.................................................................... 281
10.4.7 Examples of Use...................................................... 282
10.5 Cause-and-Effect Analysis..................................................... 282
10.5.3 Inputs.......................................................................284
10.5.4 Process.....................................................................284
10.5.5 Outputs....................................................................284
10.5.6 Strengths and Weaknesses......................................284
10.5.7 Examples of Use...................................................... 285
10.6 Cause-Consequence Analysis................................................ 285
10.6.3 Inputs....................................................................... 287
10.6.4 Process..................................................................... 287
10.6.5 Outputs.................................................................... 288
10.6.7 Examples of Use...................................................... 288
10.7 Checklists............................................................................... 288
10.7.3 Inputs....................................................................... 289
10.7.4 Outputs.................................................................... 289
10.7.6 Examples of Use...................................................... 290
10.8 Cost-Benefit Analysis............................................................. 290
10.8.3 Inputs....................................................................... 291
10.8.4 Process..................................................................... 291
10.8.5 Outputs.................................................................... 292
xiv Contents
10.9 Examples of Use..................................................................... 292

10.10 Delphi Techniques.................................................................. 293
10.10.3 Inputs....................................................................... 293
10.10.4 Process..................................................................... 293
10.10.5 Outputs.................................................................... 294
10.10.7 Examples of Use...................................................... 294
10.11 Dose-Response Curve............................................................ 295
10.11.3 Inputs....................................................................... 296
10.11.4 Process..................................................................... 296
10.11.5 Outputs.................................................................... 296
10.11.7 Examples of Use...................................................... 296
10.12 Ecological Risk Assessment................................................... 297
10.12.3 Inputs....................................................................... 297
10.12.4 Process..................................................................... 298
10.12.5 Outputs.................................................................... 299
10.12.7 Examples of Use...................................................... 299
10.13 Event Tree............................................................................... 299
10.13.3 Inputs....................................................................... 301
10.13.4 Process..................................................................... 301
10.13.5 Outputs....................................................................302
10.13.7 Examples of Use...................................................... 303
10.14 Evidence Maps....................................................................... 303
10.14.3 Inputs.......................................................................304
10.14.4 Process.....................................................................304
10.14.5 Outputs....................................................................304
10.14.7 Examples of Use...................................................... 305
10.15 Expert Elicitation.................................................................... 305
10.15.3 Inputs.......................................................................306
Contents xv
10.15.4 Process.....................................................................306
10.15.5 Outputs....................................................................306
10.15.7 Examples of Use......................................................307
10.16 Failure Modes and Effects Analysis.......................................307
10.16.3 Inputs.......................................................................308
10.16.4 Process.....................................................................308
10.16.5 Outputs....................................................................309
10.16.7 Examples of Use...................................................... 310
10.17 Fault Tree................................................................................ 310
10.17.3 Inputs....................................................................... 311
10.17.4 Process..................................................................... 312
10.17.5 Outputs.................................................................... 312
10.17.7 Examples of Use...................................................... 313
10.18 Fragility Curves...................................................................... 313
10.18.3 Inputs....................................................................... 314
10.18.4 Process..................................................................... 314
10.18.5 Output...................................................................... 315
10.18.6.1 Judgmental Approach............................ 315
10.18.6.2 Empirical Approach............................... 315
10.18.6.3 Analytical Approach.............................. 315
10.18.6.4 Hybrid Approach.................................... 316
10.18.7 Examples of Use...................................................... 316
10.19 Frequency Number (FN) Curves............................................ 316
10.19.3 Inputs....................................................................... 318
10.19.4 Process..................................................................... 318
10.19.5 Outputs.................................................................... 318
10.19.7 Examples of Use...................................................... 319
10.20 Generic Process...................................................................... 319
10.20.3 Inputs....................................................................... 320
10.20.4 Process..................................................................... 320
xvi Contents
10.20.5 Outputs.................................................................... 321

10.20.7 Examples of Use...................................................... 321
10.21 Hazard Analysis and Critical Control Points (HACCP)........ 322
10.21.3 Inputs....................................................................... 322
10.21.4 Process..................................................................... 322
10.21.5 Outputs.................................................................... 324
10.21.7 Examples of Use...................................................... 325
10.22 Hazard Operability Study (HAZOP)..................................... 325
10.22.3 Inputs....................................................................... 326
10.22.4 Process..................................................................... 326
10.22.5 Outputs.................................................................... 327
10.22.7 Examples of Use...................................................... 328
10.23 Heat Map................................................................................ 328
10.23.3 Inputs....................................................................... 329
10.23.4 Process..................................................................... 329
10.23.5 Outputs.................................................................... 329
10.23.7 Examples of Use...................................................... 330
10.24 Human Reliability Assessment.............................................. 330
10.24.3 Inputs....................................................................... 331
10.24.4 Process..................................................................... 331
10.24.5 Outputs.................................................................... 332
10.24.7 Examples of Use...................................................... 332
10.25 Increase or Decrease Risk...................................................... 332
10.25.3 Inputs....................................................................... 333
10.25.4 Process..................................................................... 333
10.25.5 Outputs.................................................................... 334
10.25.7 Examples of Use...................................................... 334
10.26 Interviews............................................................................... 334
Contents xvii
10.26.3 Inputs....................................................................... 335

10.26.4 Process..................................................................... 335
10.26.5 Outputs.................................................................... 335
10.26.7 Examples of Use...................................................... 336
10.27 Layer of Protection Analysis.................................................. 336
10.27.3 Inputs....................................................................... 337
10.27.4 Process..................................................................... 337
10.27.5 Outputs.................................................................... 338
10.27.7 Examples of Use...................................................... 339
10.28 Markov Analysis..................................................................... 339
10.28.3 Inputs.......................................................................340
10.28.4 Process.....................................................................340
10.28.5 Outputs.................................................................... 342
10.28.7 Examples of Use...................................................... 342
10.29 Monte Carlo Process.............................................................. 342
10.29.3 Inputs....................................................................... 343
10.29.4 Process..................................................................... 343
10.29.5 Outputs....................................................................344
10.29.7 Examples of Use......................................................346
10.30 Multicriteria Decision Analysis..............................................346
10.30.3 Inputs.......................................................................346
10.30.4 Process..................................................................... 347
10.30.5 Outputs.................................................................... 347
10.30.7 Examples of Use...................................................... 350
10.31 Ordering Techniques.............................................................. 350
10.31.1 Chronology.............................................................. 350
10.31.1.1 Overview of the Technique.................... 350
10.31.1.2 How the Technique Is Used................... 351
10.31.1.3 Inputs...................................................... 351
10.31.1.4 Process................................................... 351
10.31.1.5 Outputs................................................... 351
10.31.1.6 Strengths and Weaknesses..................... 351
10.31.1.7 Examples of Use..................................... 352
xviii Contents
10.31.2 Screening................................................................. 352

10.31.2.3 Inputs...................................................... 352
10.31.2.4 Process................................................... 353
10.31.2.5 Outputs................................................... 353
10.31.2.7 Examples of Use..................................... 353
10.31.3 Ratings..................................................................... 353
10.31.3.3 Inputs...................................................... 354
10.31.3.4 Process................................................... 354
10.31.3.5 Outputs................................................... 354
10.31.3.7 Examples of Use..................................... 355
10.31.4 Rankings................................................................. 355
10.31.4.3 Inputs...................................................... 355
10.31.4.4 Process................................................... 355
10.31.4.5 Output..................................................... 355
10.31.4.7 Examples of Use..................................... 356
10.32 Preliminary Hazard Analysis................................................. 356
10.32.3 Inputs....................................................................... 357
10.32.4 Process..................................................................... 357
10.32.5 Outputs.................................................................... 357
10.32.7 Examples of Use...................................................... 358
10.33 Qualitative Risk Assessment Models..................................... 358
10.33.3 Inputs....................................................................... 361
10.33.4 Process..................................................................... 361
10.33.5 Outputs.................................................................... 361
10.33.7 Examples of Use...................................................... 362
10.34 Reliability-Centered Maintenance......................................... 362
10.34.3 Inputs....................................................................... 363
10.34.4 Process..................................................................... 363
Contents xix
10.34.5 Outputs....................................................................364
10.34.7 Examples of Use...................................................... 365
10.35 Risk Control Effectiveness..................................................... 365
10.35.3 Inputs....................................................................... 366
10.35.4 Process..................................................................... 366
10.35.5 Outputs.................................................................... 366
10.35.7 Examples of Use...................................................... 367
10.36 Risk Indices............................................................................ 367
10.36.3 Inputs....................................................................... 367
10.36.4 Process..................................................................... 368
10.36.5 Outputs.................................................................... 369
10.36.7 Examples of Use...................................................... 370
10.37 Risk Matrix (Operational Risk Management)........................ 370
10.37.3 Inputs....................................................................... 371
10.37.4 Process..................................................................... 372
10.37.5 Outputs.................................................................... 372
10.37.7 Examples of Use...................................................... 373
10.38 Risk Narrative......................................................................... 374
10.38.3 Inputs....................................................................... 374
10.38.4 Process..................................................................... 374
10.38.5 Outputs.................................................................... 374
10.38.7 Examples of Use...................................................... 375
10.39 Root-Cause Analysis.............................................................. 375
10.39.3 Inputs....................................................................... 376
10.39.4 Process..................................................................... 376
10.39.5 Outputs.................................................................... 377
10.39.7 Examples of Use...................................................... 378
10.40 Safety Assessment.................................................................. 378
xx Contents

10.40.3 Inputs....................................................................... 378
10.40.4 Process..................................................................... 378
10.40.5 Outputs.................................................................... 380
10.40.7 Examples of Use...................................................... 380
10.41 Scenario Analysis................................................................... 380
10.41.3 Inputs....................................................................... 382
10.41.4 Process..................................................................... 382
10.41.5 Outputs.................................................................... 382
10.41.7 Examples of Use...................................................... 384
10.42 Scenario Planning................................................................... 384
10.42.3 Inputs....................................................................... 385
10.42.4 Process..................................................................... 385
10.42.5 Outputs.................................................................... 386
10.42.7 Examples of Use...................................................... 387
10.43 Semiquantitative Risk Assessment Example.......................... 387
10.43.3 Inputs....................................................................... 388
10.43.4 Process..................................................................... 388
10.43.5 Outputs.................................................................... 390
10.43.7 Examples of Use...................................................... 390
10.44 Sensitivity Analysis................................................................ 390
10.44.3 Inputs....................................................................... 391
10.44.4 Process..................................................................... 391
10.44.6 Examples of Use...................................................... 392
10.45 Structured What-If Technique (SWIFT)................................ 393
10.45.3 Inputs....................................................................... 393
10.45.4 Process..................................................................... 393
10.45.5 Outputs.................................................................... 394
10.45.7 Examples of Use...................................................... 394
Contents xxi
10.46 Subjective Probability Elicitation........................................... 395

10.46.3 Inputs....................................................................... 396
10.46.4 Process..................................................................... 396
10.46.5 Outputs.................................................................... 396
10.46.7 Examples of Use...................................................... 396
10.47 Uncertainty Decision Rules.................................................... 397
10.47.3 Inputs....................................................................... 397
10.47.4 Process..................................................................... 397
10.47.5 Outputs.................................................................... 398
10.47.7 Examples of Use...................................................... 399
10.48 Vulnerability Assessment....................................................... 399
10.48.3 Inputs....................................................................... 399
10.48.4 Process..................................................................... 399
10.48.5 Outputs.................................................................... 401
10.48.7 Examples of Use...................................................... 401
References.........................................................................................402
Chapter 11 The Art and Practice of Risk Assessment Modeling........................405

11.1 Introduction............................................................................405
11.2 Types of Models.....................................................................406
11.3 A Model-Building Process.....................................................409
11.3.1 Get the Question Right............................................ 410
11.3.2 Know the Uses of Your Model................................ 410
11.3.3 Build a Conceptual Model...................................... 411
11.3.4 Specify the Model................................................... 411
11.3.5 Build a Computational Model................................. 412
11.3.6 Verify the Model..................................................... 412
11.3.7 Validate the Model.................................................. 413
11.3.8 Design Simulation Experiments.............................. 414
11.3.9 Make Production Runs............................................ 414
11.3.10 Analyze Simulation Results.................................... 415
11.3.11 Organize and Present Results.................................. 415
11.3.12 Answer the Question(s)........................................... 416
11.3.13 Document Model and Results................................. 416
xxii Contents
11.4 Simulation Models.................................................................. 416

11.5 Required Skill Sets................................................................. 418
11.5.1 Technical Skills....................................................... 418
11.5.2 Craft Skills.............................................................. 419
11.5.2.1 The Art of Modeling.............................. 419
11.5.2.2 The Practice of Modeling...................... 432
References......................................................................................... 447
Chapter 12 Probability Review............................................................................449

12.1 Introduction............................................................................449
12.2 Two Schools of Thought......................................................... 450
12.3 Probability Essentials............................................................. 451
12.4 How Do We Get Probabilities?............................................... 455
12.5 Working with Probabilities..................................................... 456
12.5.1 Axioms.................................................................... 456
12.5.2 Propositions and Rules............................................ 457
12.5.2.1 Marginal Probability.............................. 457
12.5.2.2 Complementarity.................................... 457
12.5.2.3 Addition Rules........................................ 458
12.5.2.4 Multiplication Rules............................... 458
12.5.2.5 Conditional Probability..........................460
12.5.2.6 Bayes’ Theorem..................................... 461
12.6 Why You Need to Know This................................................ 463
References.........................................................................................464
Chapter 13 Choosing a Probability Distribution.................................................465

13.1 Introduction............................................................................465
13.2 Graphical Review...................................................................465
13.2.1 Probability Density Function..................................465
13.2.2 Cumulative Distribution Function...........................468
13.2.3 Survival Function....................................................469
13.2.4 Probability Mass Function...................................... 470
13.2.5 Cumulative Distribution Function for a
Discrete Random Variable...................................... 470
13.3 Strategy for Selecting a Probability Distribution................... 471
13.3.1 Use Your Data......................................................... 472
13.3.2 Understand Your Data............................................. 475
13.3.2.1 What Is the Source of Your Data?.......... 477
13.3.2.2 Is Your Variable Discrete or
Continuous?............................................ 477
13.3.2.3 Is Your Variable Bounded or
Unbounded?........................................... 478
Contents xxiii
13.3.2.4 Parametric and Nonparametric

Distributions........................................... 479
13.3.2.5 Univariate or Multivariate
Distributions........................................... 486
13.3.3 Plot Your Data......................................................... 486
13.3.4 Theory-Based Choice.............................................. 488
13.3.5 Calculate Statistics.................................................. 489
13.3.6 Previous Experience................................................ 490
13.3.7 Distribution Fitting.................................................. 490
13.3.8 Seek Expert Opinion............................................... 493
13.3.9 Sensitivity Analysis................................................. 494
13.4 Example 1............................................................................... 494
13.4.1 Understand Your Variable and Data........................ 494
13.4.2 Look at Your Data................................................... 495
13.4.3 Use Theory.............................................................. 495
13.4.4 Calculate Some Statistics........................................ 496
13.4.5 Use Previous Experience......................................... 496
13.4.7 Expert Opinion........................................................ 498
13.4.9 Final Choice............................................................ 499
13.5 Example 2............................................................................... 499
13.5.1 Understand Your Variable and Data........................500
13.5.2 Look at Your Data...................................................500
13.5.3 Use Theory..............................................................500
13.5.4 Calculate Some Statistics........................................500
13.5.5 Use Previous Experience.........................................500
13.5.7 Expert Opinion........................................................ 501
13.5.9 Final Choice............................................................ 501
13.6 A Dozen Useful Probability Distributions for Risk
Assessors................................................................................ 502
13.6.1 Four Useful Distributions for Sparse Data.............. 502
13.6.2 Four Useful Discrete Distributions.........................504
13.6.3 Four Useful Continuous Distributions.................... 507
References......................................................................................... 510
Chapter 14 Characterizing Uncertainty through Expert Elicitation.................... 511

14.1 Introduction............................................................................ 511
14.2 Personal Opinion, Professional Opinion, and Expert
Judgment................................................................................. 512
14.3 What Kinds of Uncertain Values?.......................................... 514
14.4 Subjective Probability Distributions....................................... 516
xxiv Contents
14.5 The Elicitation Protocol......................................................... 517

14.6 Eliciting Subjective Probability Distributions........................ 519
14.7 Making Judgments Under Uncertainty.................................. 524
14.7.1 Overconfidence........................................................ 524
14.7.2 Availability.............................................................. 525
14.7.3 Representativeness.................................................. 526
14.7.3.1 Conjunction Fallacy............................... 527
14.7.3.2 Base-Rate Neglect.................................. 527
14.7.3.3 Law of Small Numbers.......................... 528
14.7.3.4 Confusion of the Inverse........................ 529
14.7.3.5 Confounding Variables.......................... 529
14.7.4 Anchoring-and-Adjustment..................................... 530
14.7.5 Motivational Bias.................................................... 531
14.7.6 Confirmation Bias................................................... 532
14.7.7 Framing Bias........................................................... 532
14.8 Calibration.............................................................................. 533
14.9 Multiple Experts..................................................................... 534
References......................................................................................... 537
Chapter 15 Monte Carlo Process......................................................................... 539

15.1 Introduction............................................................................ 539
15.2 Background............................................................................. 539
15.3 A Two-Step Process...............................................................540
15.3.1 Random Number Generation.................................. 541
15.3.2 Transformation........................................................ 543
15.4 How Many Iterations?............................................................544
15.5 Sampling Method................................................................... 545
15.6 An Illustration........................................................................546
References......................................................................................... 548
Chapter 16 Probabilistic Scenario Analysis........................................................ 549

16.1 Introduction............................................................................ 549
16.2 Common Scenarios................................................................ 550
16.3 Types of Scenario Analysis.................................................... 552
16.4 Scenario Comparisons............................................................ 552
16.5 Tools for Constructing Scenarios........................................... 557
16.5.1 Influence Diagrams................................................. 557
16.5.2 Tree Models............................................................. 558
16.6 Adding Probability to the Scenarios...................................... 562
16.7 An Example............................................................................ 563
References......................................................................................... 570
Contents xxv
Chapter 17 Sensitivity Analysis........................................................................... 571

17.1 Introduction............................................................................ 571
17.2 Qualitative Sensitivity Analysis............................................. 573
17.2.1 Identifying Specific Sources of Uncertainty........... 573
17.2.2 Ascertaining the Sources of Instrumental
Uncertainty.............................................................. 574
17.2.3 Qualitatively Characterizing the Uncertainty......... 575
17.2.4 Vary the Key Assumptions...................................... 578
17.3 Quantitative Sensitivity Analysis........................................... 579
17.3.1 Scenario Analysis.................................................... 579
17.3.2 Mathematical Methods for Sensitivity Analysis.......581
17.3.2.1 Nominal Range Sensitivity.................... 582
17.3.2.2 Difference in Log-Odds Ratio
(ΔLOR).................................................. 587
17.3.2.3 Break-Even Analysis.............................. 590
17.3.2.4 Automatic Differentiation
Technique............................................... 591
17.3.3 Statistical Methods for Sensitivity Analysis........... 592
17.3.3.1 Regression Analysis............................... 592
17.3.3.2 Correlation............................................. 594
17.3.3.3 Analysis of Variance.............................. 596
17.3.3.4 Response-Surface Method (RSM)......... 596
17.3.3.5 Fourier-Amplitude Sensitivity Test........ 597
17.3.3.6 Mutual Information Index...................... 597
17.3.4 Graphical Methods for Sensitivity Analysis........... 598
17.3.4.1 Scatter Plots............................................ 598
17.3.4.2 Tornado Plots......................................... 598
17.3.4.3 Spider Plot.............................................. 601
17.4 The Point................................................................................603
References.........................................................................................605
Chapter 18 Presenting and Using Assessment Results........................................609

18.1 Introduction............................................................................609
18.2 Understand Your Assessment Output Data Before You
Explain It................................................................................ 610
18.3 Examine the Quantities.......................................................... 610
18.3.1 Categorical Quantities............................................. 610
18.3.2 Nonprobabilistic and Probabilistic Quantities........ 615
18.3.2.1 Graphics................................................. 617
18.3.2.2 Numbers................................................. 621
18.4 Examine the Probabilities...................................................... 624
18.4.1 Quartiles.................................................................. 626
18.4.2 Probabilities of Thresholds..................................... 627
xxvi Contents
18.4.3 Confidence Statements............................................ 628

18.4.4 Tail Probabilities and Extreme Events.................... 630
18.4.5 Stochastic Dominance............................................. 632
18.5 Examine Relationships........................................................... 634
18.5.1 Scatter Plots............................................................. 634
18.5.2 Correlation............................................................... 637
18.5.3 Re-Expression......................................................... 638
18.5.4 Comparison............................................................. 639
18.6 Answer the Questions............................................................. 639
18.7 Data Visualization.................................................................. 642
18.8 Big Data and Risk Management.............................................646
References......................................................................................... 649
Chapter 19 Decision Making Under Uncertainty................................................ 651

19.1 Introduction............................................................................ 651
19.2 Decision-Making Strategies................................................... 652
19.3 Evidence-Based Decision Making......................................... 656
19.4 How Much Evidence is Enough?............................................660
19.4.1 There Is a Best Time to Decide............................... 663
19.5 Classifications of Uncertainty................................................666
19.6 Strategies for Deciding in Deep Uncertainty......................... 670
19.7 Communicating Uncertainty to Decision Makers.................. 671
19.8 A Practical Approach............................................................. 673
19.8.1 Understand the Decision to be Made...................... 675
19.8.2 Understand the Residual Risks and Residual
Uncertainty.............................................................. 676
19.8.3 Ask Clarifying Questions........................................ 679
19.8.4 Make a Decision or Not........................................... 681
19.9 Practical Changes................................................................... 681
19.9.1 Change the Decision Meeting................................. 681
19.9.2 Question the Numbers............................................. 682
19.9.3 “Power Down” Decision Making............................ 683
19.9.4 Socialize Errors from Good Risk Management...... 683
19.10 Risk Metrics........................................................................... 683
19.11 Decision Analysis................................................................... 687
19.11.1 The Example........................................................... 688
19.11.2 Decision Making without Probability..................... 689
19.11.3 Decision Making with Probability.......................... 691
19.11.4 Risk Profile and Sensitivity..................................... 692
19.11.5 Value of Additional Information............................. 693
References......................................................................................... 695
Contents xxvii
Chapter 20 Message Development....................................................................... 699

20.1 Introduction............................................................................ 699
20.2 Communication Models......................................................... 699
20.3 Risk Communication Message Strategies..............................700
20.4 Crisis Communication............................................................ 703
20.5 Message Mapping................................................................... 705
20.6 Developing Risk Communication Messages.......................... 707
20.7 Impediments to Risk Communication.................................... 710
References......................................................................................... 711
Chapter 21 Telling Your Story............................................................................. 713

21.1 Introduction............................................................................ 713
21.2 Let Us Clarify......................................................................... 715
21.3 The Problems with Reports.................................................... 716
21.4 What Is a Story?..................................................................... 717
21.5 Why We Need Stories............................................................ 718
21.6 When Are Stories Needed?.................................................... 719
21.7 What Makes a Good Story?................................................... 719
21.8 How to Write an Effective Story............................................ 720
21.8.1 Write a Riskography................................................ 721
21.8.2 Writing News Stories.............................................. 722
21.8.3 General Guidance for Storytelling.......................... 724
21.8.3.1 Structure Your Story.............................. 724
21.8.3.2 The Structure of a Strong Story............. 725
21.8.4 Eight Good Ideas for a Risk Story.......................... 726
21.9 Telling Stories with Data........................................................ 726
21.9.1 Use Graphics........................................................... 731
21.10 Probability Words................................................................... 732
21.11 Alternative Story Media......................................................... 734
21.11.1 Personal Communication as Documentation.......... 734
21.11.2 Digital Stories.......................................................... 735
21.11.3 Social Media............................................................ 737
References......................................................................................... 739
Chapter 22 Example Applications....................................................................... 741

22.1 Introduction............................................................................ 741
22.2 Qualitative Ranking Assessments.......................................... 741
22.2.1 Enhanced Criteria-Based Ranking.......................... 741
22.2.2 Paired Ranking........................................................ 746
22.3 Phytosanitary Generic Risk Assessment................................ 749
xxviii Contents
22.4 Aquatic Nuisance Species Risk.............................................. 753

22.5 Cost Risk................................................................................ 758
22.6 Food Safety Risk.................................................................... 760
22.7 Levee Safety........................................................................... 763
22.8 Ecological Risk....................................................................... 765
References......................................................................................... 767
Appendix A: Using Palisade’s DecisionTools® Suite.......................................... 769
Index....................................................................................................................... 793
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Principles of Risk Analysis: Decision

Making Under Uncertainty Charles Yoe

Expertise Under Scrutiny: 21st Century Decision Making

Financial Accounting: Reporting, Analysis and Decision

Business Analytics Data Analysis Decision Making 6th

Decision making Analysis and Optimization Modeling of

Business Analytics: Data Analysis & Decision Making

The Cognitive Autopsy: A Root Cause Analysis of Medical

Data Analysis for Business Decision Making: A

Schwartz’s Principles of Surgery F. Charles Brunicardi

© 2019 by Taylor & Francis Group, LLC

No claim to original U.S. Government works

Printed on acid-free paper

International Standard Book Number-13: 978-1-138-47820-6 (Hardback)

Library of Congress Cataloging-in-Publication Data

Names: Yoe, Charles E., author.

Visit the Taylor & Francis Web site at

Chapter 1 The Basics............................................................................................. 1

2.3.4 Sources of Uncertainty in Empirical Quantities.......40

Chapter 3 Risk Management................................................................................ 47

3.5.2 Evaluating Risk Management Options...................... 79

Chapter 4 Risk Assessment..................................................................................99

Chapter 5 Risk Communication......................................................................... 133

5.4 External Risk Communication............................................... 140

Chapter 6 Enterprise Risk Management............................................................ 173

Chapter 7 Problem Identification for Risk Management...................................207

Chapter 8 Brainstorming................................................................................... 235

8.8 Do You Need a Facilitator?.................................................... 247

Chapter 9 Economics of Risk Management....................................................... 251

Chapter 10 Risk Assessor’s Toolbox.................................................................... 273

10.3 Bayesian Statistics and Bayes Nets......................................... 276

10.9 Examples of Use..................................................................... 292

10.20.5 Outputs.................................................................... 321

10.26.3 Inputs....................................................................... 335

10.31.2 Screening................................................................. 352

10.40.2 How the Technique Is Used..................................... 378

10.46 Subjective Probability Elicitation........................................... 395

Chapter 11 The Art and Practice of Risk Assessment Modeling........................405

11.4 Simulation Models.................................................................. 416

Chapter 12 Probability Review............................................................................449

Chapter 13 Choosing a Probability Distribution.................................................465

13.3.2.4 Parametric and Nonparametric

Chapter 14 Characterizing Uncertainty through Expert Elicitation.................... 511

14.5 The Elicitation Protocol......................................................... 517

Chapter 15 Monte Carlo Process......................................................................... 539

Chapter 16 Probabilistic Scenario Analysis........................................................ 549

Chapter 17 Sensitivity Analysis........................................................................... 571

Chapter 18 Presenting and Using Assessment Results........................................609

18.4.3 Confidence Statements............................................ 628

Chapter 19 Decision Making Under Uncertainty................................................ 651

Chapter 20 Message Development....................................................................... 699

Chapter 21 Telling Your Story............................................................................. 713

Chapter 22 Example Applications....................................................................... 741

22.4 Aquatic Nuisance Species Risk.............................................. 753

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