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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
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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 />Visit the Taylor & Francis Web site at

and the CRC Press Web site at



In loving memory of Jason Charles Yoe



Contents
Preface...................................................................................................................xxix

About the Author...................................................................................................xxxi
Chapter 1 The Basics............................................................................................. 1
1.1
1.2

What is Risk?.............................................................................. 1
How Do We Identify a Risk?...................................................... 4
1.2.1Trigger.........................................................................4
1.2.2
Hazard or Opportunity................................................5
1.2.3Consequence................................................................5
1.2.4
Sequence of Events...................................................... 6
1.2.5Uncertainty.................................................................. 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
2.1Introduction.............................................................................. 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
2.3.4.6Disagreement........................................... 42
2.3.4.7Approximation......................................... 42
2.4 Being Intentional about Uncertainty........................................ 43
2.5 Summary and Look Forward...................................................46
References...........................................................................................46
Chapter 3 Risk Management................................................................................ 47
3.1Introduction.............................................................................. 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
3.4.1.1Policy........................................................ 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


ix

Contents


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
3.6.1Monitoring................................................................. 89
3.6.2
Evaluation and Iteration............................................ 91
3.7 Risk Communication................................................................92
3.8 Risk Management Models........................................................92
3.9 Summary and Look Forward...................................................97
References...........................................................................................97
Chapter 4 Risk Assessment..................................................................................99
4.1Introduction..............................................................................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
5.1Introduction............................................................................ 133
5.2Definitions.............................................................................. 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
5.5 Summary and Look Forward................................................. 169

References......................................................................................... 169

Chapter 6 Enterprise Risk Management............................................................ 173
6.1Introduction............................................................................ 173
6.2 What is Enterprise Risk Management?.................................. 173
6.3History.................................................................................... 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
7.1Introduction............................................................................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
7.5.3Appreciation............................................................ 222
7.5.4
Be a Reporter........................................................... 222

7.5.5Utopia...................................................................... 223
7.5.6Benchmarking......................................................... 223
7.5.7Checklists................................................................224
7.5.8
Inverse Brainstorming.............................................224
7.5.9Bitching................................................................... 225
7.5.10 Draw a Picture of the Problem................................ 225
7.5.11 Mind Maps.............................................................. 225
7.5.12 Why-Why Diagram................................................. 227
7.5.13Restatement............................................................. 227
7.6 The P&O Statement................................................................ 229
7.7 Two Problem Solving Traits................................................... 231
7.8 Summary and Look Forward................................................. 232
References......................................................................................... 233
Chapter 8 Brainstorming................................................................................... 235
8.1Introduction............................................................................ 235
8.2 What Can You Brainstorm?.................................................... 236
8.3Background............................................................................. 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

8.5.1Brainstorming......................................................... 241
8.5.2Brainwriting............................................................ 242
8.5.2.1Poolwriting............................................. 242
8.5.2.2 Gallery Writing...................................... 243
8.5.2.3 Electronic Brainwriting.......................... 243
8.63× Yeah..................................................................................244
8.7 Group Evaluations with Colored Dots....................................246


xii

Contents

8.8 Do You Need a Facilitator?.................................................... 247
8.9Addendum..............................................................................248
8.10 Summary and Look Forward................................................. 249
References......................................................................................... 250
Chapter 9 Economics of Risk Management....................................................... 251
9.1Introduction............................................................................ 251
9.2 Economics for Risk Managers............................................... 251
9.3 Economics and Decision Making........................................... 252
9.3.1Scarcity.................................................................... 252
9.3.2Trade-Offs............................................................... 253
9.3.3
Opportunity Cost..................................................... 254
9.3.4
Marginal Analysis................................................... 256
9.3.5Incentives................................................................. 259
9.3.6
Rent Seeking...........................................................260

9.4 Economic Basis for Interactions among People..................... 261
9.4.1Trade........................................................................ 261
9.4.2Markets.................................................................... 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
9.8 Summary and Look Forward................................................. 270
References......................................................................................... 271
Chapter 10 Risk Assessor’s Toolbox.................................................................... 273
10.1Introduction............................................................................ 273
10.2Brainstorming......................................................................... 274
10.2.1 Overview of the Technique..................................... 274

10.2.2 How the Technique Is Used..................................... 274
10.2.3Inputs....................................................................... 275
10.2.4Process..................................................................... 275
10.2.5Outputs.................................................................... 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
10.3.1 Overview of the Technique..................................... 276
10.3.2 How the Technique Is Used..................................... 277
10.3.3Inputs....................................................................... 277
10.3.4Process..................................................................... 277
10.3.5Outputs.................................................................... 279
10.3.6 Strengths and Weaknesses...................................... 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
10.4.3Inputs....................................................................... 281
10.4.4Process..................................................................... 281
10.4.5Outputs.................................................................... 281
10.4.6 Strengths and Weaknesses...................................... 281
10.4.7 Examples of Use...................................................... 282
10.5 Cause-and-Effect Analysis..................................................... 282
10.5.1 Overview of the Technique..................................... 283

10.5.2 How the Technique Is Used..................................... 283
10.5.3Inputs.......................................................................284
10.5.4Process.....................................................................284
10.5.5Outputs....................................................................284
10.5.6 Strengths and Weaknesses......................................284
10.5.7 Examples of Use...................................................... 285
10.6 Cause-Consequence Analysis................................................ 285
10.6.1 Overview of the Technique..................................... 285
10.6.2 How the Technique Is Used..................................... 285
10.6.3Inputs....................................................................... 287
10.6.4Process..................................................................... 287
10.6.5Outputs.................................................................... 288
10.6.6 Strengths and Weaknesses...................................... 288
10.6.7 Examples of Use...................................................... 288
10.7Checklists............................................................................... 288
10.7.1 Overview of the Technique..................................... 288
10.7.2 How the Technique Is Used..................................... 289
10.7.3Inputs....................................................................... 289
10.7.4Outputs.................................................................... 289
10.7.5 Strengths and Weaknesses...................................... 290
10.7.6 Examples of Use...................................................... 290
10.8 Cost-Benefit Analysis............................................................. 290
10.8.1 Overview of the Technique..................................... 290
10.8.2 How the Technique Is Used..................................... 291
10.8.3Inputs....................................................................... 291
10.8.4Process..................................................................... 291
10.8.5Outputs.................................................................... 292
10.8.6 Strengths and Weaknesses...................................... 292



xiv

Contents

10.9 Examples of Use..................................................................... 292
10.10 Delphi Techniques.................................................................. 293
10.10.1 Overview of the Technique..................................... 293
10.10.2 How the Technique Is Used..................................... 293
10.10.3Inputs....................................................................... 293
10.10.4Process..................................................................... 293
10.10.5Outputs.................................................................... 294
10.10.6 Strengths and Weaknesses...................................... 294
10.10.7 Examples of Use...................................................... 294
10.11 Dose-Response Curve............................................................ 295
10.11.1 Overview of the Technique..................................... 295
10.11.2 How the Technique Is Used..................................... 295
10.11.3Inputs....................................................................... 296
10.11.4Process..................................................................... 296
10.11.5Outputs.................................................................... 296
10.11.6 Strengths and Weaknesses...................................... 296
10.11.7 Examples of Use...................................................... 296
10.12 Ecological Risk Assessment................................................... 297
10.12.1 Overview of the Technique..................................... 297
10.12.2 How the Technique Is Used..................................... 297
10.12.3Inputs....................................................................... 297
10.12.4Process..................................................................... 298
10.12.5Outputs.................................................................... 299
10.12.6 Strengths and Weaknesses...................................... 299
10.12.7 Examples of Use...................................................... 299
10.13 Event Tree............................................................................... 299

10.13.1 Overview of the Technique..................................... 299
10.13.2 How the Technique Is Used.....................................300
10.13.3Inputs....................................................................... 301
10.13.4Process..................................................................... 301
10.13.5Outputs....................................................................302
10.13.6 Strengths and Weaknesses......................................302
10.13.7 Examples of Use...................................................... 303
10.14 Evidence Maps....................................................................... 303
10.14.1 Overview of the Technique..................................... 303
10.14.2 How the Technique Is Used..................................... 303
10.14.3Inputs.......................................................................304
10.14.4Process.....................................................................304
10.14.5Outputs....................................................................304
10.14.6 Strengths and Weaknesses...................................... 305
10.14.7 Examples of Use...................................................... 305
10.15 Expert Elicitation.................................................................... 305
10.15.1 Overview of the Technique..................................... 305
10.15.2 How the Technique Is Used..................................... 305
10.15.3Inputs.......................................................................306


Contents

xv

10.15.4Process.....................................................................306
10.15.5Outputs....................................................................306
10.15.6 Strengths and Weaknesses......................................306
10.15.7 Examples of Use......................................................307
10.16 Failure Modes and Effects Analysis.......................................307

10.16.1 Overview of the Technique.....................................307
10.16.2 How the Technique Is Used.....................................308
10.16.3Inputs.......................................................................308
10.16.4Process.....................................................................308
10.16.5Outputs....................................................................309
10.16.6 Strengths and Weaknesses...................................... 310
10.16.7 Examples of Use...................................................... 310
10.17 Fault Tree................................................................................ 310
10.17.1 Overview of the Technique..................................... 310
10.17.2 How the Technique Is Used..................................... 311
10.17.3Inputs....................................................................... 311
10.17.4Process..................................................................... 312
10.17.5Outputs.................................................................... 312
10.17.6 Strengths and Weaknesses...................................... 312
10.17.7 Examples of Use...................................................... 313
10.18 Fragility Curves...................................................................... 313
10.18.1 Overview of the Technique..................................... 313
10.18.2 How the Technique Is Used..................................... 314
10.18.3Inputs....................................................................... 314
10.18.4Process..................................................................... 314
10.18.5Output...................................................................... 315
10.18.6 Strengths and Weaknesses...................................... 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
10.19.1 Overview of the Technique..................................... 316
10.19.2 How the Technique Is Used..................................... 316

10.19.3Inputs....................................................................... 318
10.19.4Process..................................................................... 318
10.19.5Outputs.................................................................... 318
10.19.6 Strengths and Weaknesses...................................... 319
10.19.7 Examples of Use...................................................... 319
10.20 Generic Process...................................................................... 319
10.20.1 Overview of the Technique..................................... 319
10.20.2 How the Technique Is Used..................................... 319
10.20.3Inputs....................................................................... 320
10.20.4Process..................................................................... 320


xvi

Contents

10.20.5Outputs.................................................................... 321
10.20.6 Strengths and Weaknesses...................................... 321
10.20.7 Examples of Use...................................................... 321
10.21 Hazard Analysis and Critical Control Points (HACCP)........ 322
10.21.1 Overview of the Technique..................................... 322
10.21.2 How the Technique Is Used..................................... 322
10.21.3Inputs....................................................................... 322
10.21.4Process..................................................................... 322
10.21.5Outputs.................................................................... 324
10.21.6 Strengths and Weaknesses...................................... 324
10.21.7 Examples of Use...................................................... 325
10.22 Hazard Operability Study (HAZOP)..................................... 325
10.22.1 Overview of the Technique..................................... 325
10.22.2 How the Technique Is Used..................................... 326

10.22.3Inputs....................................................................... 326
10.22.4Process..................................................................... 326
10.22.5Outputs.................................................................... 327
10.22.6 Strengths and Weaknesses...................................... 328
10.22.7 Examples of Use...................................................... 328
10.23 Heat Map................................................................................ 328
10.23.1 Overview of the Technique..................................... 328
10.23.2 How the Technique Is Used..................................... 329
10.23.3Inputs....................................................................... 329
10.23.4Process..................................................................... 329
10.23.5Outputs.................................................................... 329
10.23.6 Strengths and Weaknesses...................................... 329
10.23.7 Examples of Use...................................................... 330
10.24 Human Reliability Assessment.............................................. 330
10.24.1 Overview of the Technique..................................... 330
10.24.2 How the Technique Is Used..................................... 330
10.24.3Inputs....................................................................... 331
10.24.4Process..................................................................... 331
10.24.5Outputs.................................................................... 332
10.24.6 Strengths and Weaknesses...................................... 332
10.24.7 Examples of Use...................................................... 332
10.25 Increase or Decrease Risk...................................................... 332
10.25.1 Overview of the Technique..................................... 333
10.25.2 How the Technique Is Used..................................... 333
10.25.3Inputs....................................................................... 333
10.25.4Process..................................................................... 333
10.25.5Outputs.................................................................... 334
10.25.6 Strengths and Weaknesses...................................... 334
10.25.7 Examples of Use...................................................... 334
10.26Interviews............................................................................... 334

10.26.1 Overview of the Technique..................................... 334
10.26.2 How the Technique Is Used..................................... 335


Contents

xvii

10.26.3Inputs....................................................................... 335
10.26.4Process..................................................................... 335
10.26.5Outputs.................................................................... 335
10.26.6 Strengths and Weaknesses...................................... 336
10.26.7 Examples of Use...................................................... 336
10.27 Layer of Protection Analysis.................................................. 336
10.27.1 Overview of the Technique..................................... 336
10.27.2 How the Technique Is Used..................................... 337
10.27.3Inputs....................................................................... 337
10.27.4Process..................................................................... 337
10.27.5Outputs.................................................................... 338
10.27.6 Strengths and Weaknesses...................................... 338
10.27.7 Examples of Use...................................................... 339
10.28 Markov Analysis..................................................................... 339
10.28.1 Overview of the Technique..................................... 339
10.28.2 How the Technique Is Used..................................... 339
10.28.3Inputs.......................................................................340
10.28.4Process.....................................................................340
10.28.5Outputs.................................................................... 342
10.28.6 Strengths and Weaknesses...................................... 342
10.28.7 Examples of Use...................................................... 342
10.29 Monte Carlo Process.............................................................. 342

10.29.1 Overview of the Technique..................................... 343
10.29.2 How the Technique Is Used..................................... 343
10.29.3Inputs....................................................................... 343
10.29.4Process..................................................................... 343
10.29.5Outputs....................................................................344
10.29.6 Strengths and Weaknesses...................................... 345
10.29.7 Examples of Use......................................................346
10.30 Multicriteria Decision Analysis..............................................346
10.30.1 Overview of the Technique.....................................346
10.30.2 How the Technique Is Used.....................................346
10.30.3Inputs.......................................................................346
10.30.4Process..................................................................... 347
10.30.5Outputs.................................................................... 347
10.30.6 Strengths and Weaknesses...................................... 350
10.30.7 Examples of Use...................................................... 350
10.31 Ordering Techniques.............................................................. 350
10.31.1Chronology.............................................................. 350
10.31.1.1 Overview of the Technique.................... 350
10.31.1.2 How the Technique Is Used................... 351
10.31.1.3Inputs...................................................... 351
10.31.1.4Process................................................... 351
10.31.1.5Outputs................................................... 351
10.31.1.6 Strengths and Weaknesses..................... 351
10.31.1.7 Examples of Use..................................... 352


xviii

Contents


10.31.2Screening................................................................. 352
10.31.2.1 Overview of the Technique.................... 352
10.31.2.2 How the Technique Is Used................... 352
10.31.2.3Inputs...................................................... 352
10.31.2.4Process................................................... 353
10.31.2.5Outputs................................................... 353
10.31.2.6 Strengths and Weaknesses..................... 353
10.31.2.7 Examples of Use..................................... 353
10.31.3Ratings..................................................................... 353
10.31.3.1 Overview of the Technique.................... 353
10.31.3.2 How the Technique Is Used................... 353
10.31.3.3Inputs...................................................... 354
10.31.3.4Process................................................... 354
10.31.3.5Outputs................................................... 354
10.31.3.6 Strengths and Weaknesses..................... 354
10.31.3.7 Examples of Use..................................... 355
10.31.4Rankings................................................................. 355
10.31.4.1 Overview of the Technique.................... 355
10.31.4.2 How the Technique Is Used................... 355
10.31.4.3Inputs...................................................... 355
10.31.4.4Process................................................... 355
10.31.4.5Output..................................................... 355
10.31.4.6 Strengths and Weaknesses..................... 355
10.31.4.7 Examples of Use..................................... 356
10.32 Preliminary Hazard Analysis................................................. 356
10.32.1 Overview of the Technique..................................... 356
10.32.2 How the Technique Is Used..................................... 356
10.32.3Inputs....................................................................... 357
10.32.4Process..................................................................... 357
10.32.5Outputs.................................................................... 357

10.32.6 Strengths and Weaknesses...................................... 358
10.32.7 Examples of Use...................................................... 358
10.33 Qualitative Risk Assessment Models..................................... 358
10.33.1 Overview of the Technique..................................... 358
10.33.2 How the Technique Is Used..................................... 359
10.33.3Inputs....................................................................... 361
10.33.4Process..................................................................... 361
10.33.5Outputs.................................................................... 361
10.33.6 Strengths and Weaknesses...................................... 361
10.33.7 Examples of Use...................................................... 362
10.34 Reliability-Centered Maintenance......................................... 362
10.34.1 Overview of the Technique..................................... 362
10.34.2 How the Technique Is Used..................................... 362
10.34.3Inputs....................................................................... 363
10.34.4Process..................................................................... 363


Contents

xix

10.34.5Outputs....................................................................364
10.34.6 Strengths and Weaknesses......................................364
10.34.7 Examples of Use...................................................... 365
10.35 Risk Control Effectiveness..................................................... 365
10.35.1 Overview of the Technique..................................... 365
10.35.2 How the Technique Is Used..................................... 365
10.35.3Inputs....................................................................... 366
10.35.4Process..................................................................... 366
10.35.5Outputs.................................................................... 366

10.35.6 Strengths and Weaknesses...................................... 367
10.35.7 Examples of Use...................................................... 367
10.36 Risk Indices............................................................................ 367
10.36.1 Overview of the Technique..................................... 367
10.36.2 How the Technique Is Used..................................... 367
10.36.3Inputs....................................................................... 367
10.36.4Process..................................................................... 368
10.36.5Outputs.................................................................... 369
10.36.6 Strengths and Weaknesses...................................... 369
10.36.7 Examples of Use...................................................... 370
10.37 Risk Matrix (Operational Risk Management)........................ 370
10.37.1 Overview of the Technique..................................... 370
10.37.2 How the Technique Is Used..................................... 371
10.37.3Inputs....................................................................... 371
10.37.4Process..................................................................... 372
10.37.5Outputs.................................................................... 372
10.37.6 Strengths and Weaknesses...................................... 373
10.37.7 Examples of Use...................................................... 373
10.38 Risk Narrative......................................................................... 374
10.38.1 Overview of the Technique..................................... 374
10.38.2 How the Technique Is Used..................................... 374
10.38.3Inputs....................................................................... 374
10.38.4Process..................................................................... 374
10.38.5Outputs.................................................................... 374
10.38.6 Strengths and Weaknesses...................................... 375
10.38.7 Examples of Use...................................................... 375
10.39 Root-Cause Analysis.............................................................. 375
10.39.1 Overview of the Technique..................................... 375
10.39.2 How the Technique Is Used..................................... 375
10.39.3Inputs....................................................................... 376

10.39.4Process..................................................................... 376
10.39.5Outputs.................................................................... 377
10.39.6 Strengths and Weaknesses...................................... 377
10.39.7 Examples of Use...................................................... 378
10.40 Safety Assessment.................................................................. 378
10.40.1 Overview of the Technique..................................... 378


xx

Contents

10.40.2 How the Technique Is Used..................................... 378
10.40.3Inputs....................................................................... 378
10.40.4Process..................................................................... 378
10.40.5Outputs.................................................................... 380
10.40.6 Strengths and Weaknesses...................................... 380
10.40.7 Examples of Use...................................................... 380
10.41 Scenario Analysis................................................................... 380
10.41.1 Overview of the Technique..................................... 380
10.41.2 How the Technique Is Used..................................... 381
10.41.3Inputs....................................................................... 382
10.41.4Process..................................................................... 382
10.41.5Outputs.................................................................... 382
10.41.6 Strengths and Weaknesses...................................... 383
10.41.7 Examples of Use...................................................... 384
10.42 Scenario Planning................................................................... 384
10.42.1 Overview of the Technique..................................... 384
10.42.2 How the Technique Is Used..................................... 385
10.42.3Inputs....................................................................... 385

10.42.4Process..................................................................... 385
10.42.5Outputs.................................................................... 386
10.42.6 Strengths and Weaknesses...................................... 387
10.42.7 Examples of Use...................................................... 387
10.43 Semiquantitative Risk Assessment Example.......................... 387
10.43.1 Overview of the Technique..................................... 387
10.43.2 How the Technique Is Used..................................... 387
10.43.3Inputs....................................................................... 388
10.43.4Process..................................................................... 388
10.43.5Outputs.................................................................... 390
10.43.6 Strengths and Weaknesses...................................... 390
10.43.7 Examples of Use...................................................... 390
10.44 Sensitivity Analysis................................................................ 390
10.44.1 Overview of the Technique..................................... 391
10.44.2 How the Technique Is Used..................................... 391
10.44.3Inputs....................................................................... 391
10.44.4Process..................................................................... 391
10.44.5 Strengths and Weaknesses...................................... 392
10.44.6 Examples of Use...................................................... 392
10.45 Structured What-If Technique (SWIFT)................................ 393
10.45.1 Overview of the Technique..................................... 393
10.45.2 How the Technique Is Used..................................... 393
10.45.3Inputs....................................................................... 393
10.45.4Process..................................................................... 393
10.45.5Outputs.................................................................... 394
10.45.6 Strengths and Weaknesses...................................... 394
10.45.7 Examples of Use...................................................... 394


Contents


xxi

10.46 Subjective Probability Elicitation........................................... 395
10.46.1 Overview of the Technique..................................... 395
10.46.2 How the Technique Is Used..................................... 395
10.46.3Inputs....................................................................... 396
10.46.4Process..................................................................... 396
10.46.5Outputs.................................................................... 396
10.46.6 Strengths and Weaknesses...................................... 396
10.46.7 Examples of Use...................................................... 396
10.47 Uncertainty Decision Rules.................................................... 397
10.47.1 Overview of the Technique..................................... 397
10.47.2 How the Technique Is Used..................................... 397
10.47.3Inputs....................................................................... 397
10.47.4Process..................................................................... 397
10.47.5Outputs.................................................................... 398
10.47.6 Strengths and Weaknesses...................................... 398
10.47.7 Examples of Use...................................................... 399
10.48 Vulnerability Assessment....................................................... 399
10.48.1 Overview of the Technique..................................... 399
10.48.2 How the Technique Is Used..................................... 399
10.48.3Inputs....................................................................... 399
10.48.4Process..................................................................... 399
10.48.5Outputs.................................................................... 401
10.48.6 Strengths and Weaknesses...................................... 401
10.48.7 Examples of Use...................................................... 401
10.49 Summary and Look Forward................................................. 401
References.........................................................................................402
Chapter 11 The Art and Practice of Risk Assessment Modeling........................405

11.1Introduction............................................................................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
11.6 Summary and Look Forward................................................. 447
References......................................................................................... 447

Chapter 12 Probability Review............................................................................449
12.1Introduction............................................................................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
12.5.1Axioms.................................................................... 456
12.5.2 Propositions and Rules............................................ 457
12.5.2.1 Marginal Probability.............................. 457
12.5.2.2Complementarity.................................... 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
12.7 Summary and Look Forward.................................................464
References.........................................................................................464
Chapter 13 Choosing a Probability Distribution.................................................465
13.1Introduction............................................................................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


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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
13.4.6 Distribution Fitting.................................................. 496
13.4.7 Expert Opinion........................................................ 498
13.4.8 Sensitivity Analysis................................................. 499

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
13.5.6 Distribution Fitting.................................................. 501
13.5.7 Expert Opinion........................................................ 501
13.5.8 Sensitivity Analysis................................................. 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
13.7 Summary and Look Forward.................................................509
References......................................................................................... 510
Chapter 14 Characterizing Uncertainty through Expert Elicitation.................... 511
14.1Introduction............................................................................ 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


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Contents


14.5 The Elicitation Protocol......................................................... 517
14.6 Eliciting Subjective Probability Distributions........................ 519
14.7 Making Judgments Under Uncertainty.................................. 524
14.7.1Overconfidence........................................................ 524
14.7.2Availability.............................................................. 525
14.7.3Representativeness.................................................. 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
14.7.4Anchoring-and-Adjustment..................................... 530
14.7.5 Motivational Bias.................................................... 531
14.7.6 Confirmation Bias................................................... 532
14.7.7 Framing Bias........................................................... 532
14.8Calibration.............................................................................. 533
14.9 Multiple Experts..................................................................... 534
14.10 Summary and Look Forward................................................. 536
References......................................................................................... 537
Chapter 15 Monte Carlo Process......................................................................... 539
15.1Introduction............................................................................ 539
15.2Background............................................................................. 539
15.3 A Two-Step Process...............................................................540
15.3.1 Random Number Generation.................................. 541
15.3.2Transformation........................................................ 543
15.4 How Many Iterations?............................................................544
15.5 Sampling Method................................................................... 545
15.6 An Illustration........................................................................546
15.7 Summary and Look Forward................................................. 548
References......................................................................................... 548

Chapter 16 Probabilistic Scenario Analysis........................................................ 549
16.1Introduction............................................................................ 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
16.8 Summary and Look Forward................................................. 569
References......................................................................................... 570


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