The official release of my book Solving for Risk Management: Understanding the Critical Role of Uncertainty in Project Management is only three days away. I have written several blog posts this week, each one focusing on a single chapter. In this post, I write about Chapter 6, titled “Here Be Dragons: Considering the Tails in Risk Management.”
Ensconced in the Rare Book Division of the New York Public Library is a hollow copper globe of the Earth that measures slightly less than four and a half inches in diameter. Dating to 1504, the Hunt-Lenox globe is one of the three earliest still in existence. The phrase “HIC SVNT DRACONES” is inscribed near the eastern coast of Asia, which translates to “Here Be Dragons.” Maps from that era often had monsters, sea serpents, or dragons depicted in uncharted or unexplored areas, signifying uncertainty and risk. See the figure below for a small portion of the Carta Marina, a map of the Nordic countries drafted in 1539 that depicts a sea serpent.
A key problem with current risk management practice is that the way it is currently practiced ignores the risks, or dragons, in the right tail. Risk analysis often focuses on the use of S-curves, or cumulative distribution functions, to represent risk. Then a single value from this distribution, such as the 80th percentile, is used for funding in order to provide the project with sufficient reserves to handle cost risk. See the graph below.
While the S-curve provides useful information, it is not enough for risk management. It ignores the really bad events that projects should consider when establishing reserves. Indeed projects largely ignore the tails of risk distribution. Funding is rarely established at more than the 70th or 80th percentile, which is near the middle of a distribution. For more on this topic, check out my book, now available for pre-order from from Amazon and Barnes and Noble.