---
tags:
  - topic/risk
  - type/encyclopedia
title: Risk
---
# Risk

%%

## TALK

This note is for the concept of risk
as understood by laymen and mathematicians.

## TODO

1. Relocate profession specific content to [[risk-management]].

2. If [[#In Cost Estimation]]'s content needs to remain,
    and it isn't suited for [[actuarial-science-for-construction-estimating]],
    another cross-topic [[risk-management-for-construction-estimating]] will be necessary.
    I suspect that with some edits it will be most appropriate for [[actuarial-science]].

%%

Risk, in common parlance, is the chance that something "bad" will happen.
As such, it is generally understood as a binary, win/loss relationship.

This model of discrete probability is ubiquitous of
[[project-management-tm|Project Management™]],
and is the sort assumed when using risk registers.

> [!example]
> This scope of work presents a 1 in 10 chance of significant delay.

## In Cost Estimation

The prior model is well suited to project management,
which (being reductive) cares about why's,
where cost estimation only cares about the bottom line.

It is generally not useful for construction cost estimation.
Potential impacts sufficient to warrant documenting
should usually just be excluded.

Cost estimators usually understand risk in terms of continuous probability.

The reality of construction cost estimation is that there are _no_ certain costs.
Traditional construction estimates give a false impression of certainty
because they operate on and return fixed values.
With the most generous interpretation, they can be said to evaluate cost
in the most likely case of each axis of uncertainty.

> [!info] Escalation
> Projecting recent pricing to a later date of purchase
> based on anticipated market conditions.

> [!aside] ISO 31000
> [ISO 31000]([ISO 31000:2018 - Risk management — Guidelines](https://www.iso.org/standard/65694.html)) defines risk as the "effect of [[uncertainty]] on objectives"
> therefore referring to positive consequences of uncertainty, as well as negative ones.
>
> The standard gives a list on how to deal with risk:
>
> 1. Avoiding the risk by deciding not to start or continue with the activity that gives rise to the risk
> 2. Accepting or increasing the risk in order to pursue an opportunity
> 3. Removing the risk source
> 4. Changing the likelihood
> 5. Changing the consequences
> 6. Sharing the risk with another party or parties (including contracts and risk financing)
> 7. Retaining the risk by informed decision

## Risk Tolerance

Determining risk tolerance is a task usually appropriated by executives
(often based on [[gut-feel]]),
but that is better determined mathematically.

[Risk of ruin](https://en.wikipedia.org/wiki/Risk_of_ruin)

## Risk Analysis and Management

### Risk Registers

Risk Registers are a standard method of documenting [[risk]].
They are a hallmark of [[project-management-tm]] practice.

### Simulation

[[monte-carlo-methods]]

## Resources

* [[the-failure-of-risk-management]]
