Qualitative and quantitative risk analysis methods

Qualitative risk analysis methods

Qualitative analysis ranks risks by probability and impact using ordinal scales (low, medium, high).

1. Probability and impact assessment: each risk is given a rating for both.
2. Probability-impact matrix: combines the two ratings to give the priority.

 Impact ->   Low      Medium     High
 Prob.
 High       Medium     High      High
 Medium      Low      Medium     High
 Low         Low       Low      Medium

3. Risk categorisation: risks are grouped by source (technical, financial, etc.) to find the problem areas.
4. Risk urgency assessment: risks that need an early response are dealt with first.
5. Expert judgement and interviews.

Quantitative risk analysis methods

Quantitative analysis puts numbers on the effect of the risks.

1. Expected monetary value (EMV): EMV = P x I. Example: P = 20% and loss = Rs 10 lakh give EMV = Rs 2 lakh.
2. Decision tree analysis: branches show decisions and chance outcomes; the branch with the best expected value is chosen.
3. Sensitivity analysis: one variable is changed at a time; a tornado diagram shows the most sensitive one.
4. Simulation (Monte Carlo): many random runs of the cost or schedule model give a distribution and the probability of meeting the target.
5. PERT three-point estimate: $t_e = (a + 4m + b)/6$ and variance $((b-a)/6)^2$.
6. Interviewing and probability distributions obtained from experts.

Qualitative analysis is quick and used for all risks; quantitative analysis is slower and used for the high-priority risks.