Project Risk Management: Expected Monetary Value (EMV)

Summary

This video delves into risk analysis techniques in project management, focusing on the Perform Qualitative Risk Analysis process. It explains how risk identification and evaluation are done qualitatively and quantitatively, with tools such as Decision Tree Analysis, Monte Carlo Simulation, and Sensitivity Analysis. The script walks through a case study using Expected Monetary Value (EMV) to assess two project proposals, illustrating how probabilistic outcomes determine the best course of action. The analysis helps project managers make data-driven decisions, factoring in both risk and potential reward to choose the most promising proposal.

Takeaways

• 😀 The script discusses the process of performing risk analysis in project management, specifically focusing on qualitative and quantitative risk analysis techniques.
• 😀 It explains that risk analysis is part of the fourth process in project risk management, following risk management planning, risk identification, and risk assessment.
• 😀 Qualitative and quantitative risk analysis can be performed together, with each approach supporting and reinforcing the other.
• 😀 The script introduces the concept of 'Expected Monetary Value (EMV)' and its use in quantitative risk analysis.
• 😀 It explains the Decision Tree analysis technique, which helps choose the best course of action when the outcome is uncertain, based on probability and estimated monetary values.
• 😀 The script gives a real-world example of how to apply EMV using a case study of a company, ABC, deciding whether to proceed with two project proposals.
• 😀 The first project proposal has a 20% chance of making a profit of $300,000, and an 80% chance of losing $40,000, while the second proposal has three possible outcomes with varying probabilities of profit and loss.
• 😀 For each proposal, the script calculates the expected monetary value by multiplying the probability of each outcome by the estimated profit or loss.
• 😀 The company should select the proposal with the highest positive EMV, in this case, Project 2, which has an EMV of $30,000 compared to Project 1’s EMV of $28,000.
• 😀 The script emphasizes that the analysis involves both probabilities and estimated outcomes, and the company’s decision should be based on maximizing the expected monetary value, which aids in making more informed decisions.
• 😀 It concludes by suggesting that Project 2 has a higher likelihood of success due to its higher probability of profit, even though the estimated profit is smaller compared to Project 1.

Q & A

What is the main focus of the video script?

The main focus of the video script is on performing quantitative risk analysis in project management, specifically using the Expected Monetary Value (EMV) technique and Decision Trees to evaluate and manage project risks.

What is the purpose of performing risk analysis in project management?

Risk analysis in project management is used to identify, evaluate, and mitigate potential risks that could negatively impact the project's success, helping decision-makers make informed choices.

What are the two types of risk analysis discussed in the script?

The script discusses two types of risk analysis: qualitative risk analysis and quantitative risk analysis. These analyses can be conducted simultaneously, and they complement each other.

What is the Expected Monetary Value (EMV) technique used for?

The Expected Monetary Value (EMV) technique is used to calculate the expected outcomes of different project scenarios, taking into account both the potential profits and risks, in order to help make decisions based on the overall expected value.

How is EMV calculated in the provided case study?

EMV is calculated by multiplying the probability of each outcome by the estimated profit or loss for that outcome, then summing these values for each project to determine the overall expected monetary value.

What is the Decision Tree method mentioned in the script?

The Decision Tree method is a visual tool used in risk analysis to map out different decisions and their possible outcomes, helping to evaluate the best course of action by considering probabilities and potential financial outcomes.

In the case study, which project was determined to be more favorable based on EMV?

Project 2 was determined to be more favorable based on the EMV, with an expected monetary value of $30,000, compared to Project 1's $28,000, despite Project 1 having a higher potential profit.

Why did Project 2 have a higher EMV despite having a lower potential profit?

Project 2 had a higher EMV because it had a much higher probability (70%) of achieving a profit of $60,000, compared to Project 1, which had a smaller probability (20%) of achieving a profit of $300,000.

What role does probability play in the EMV calculation?

Probability plays a crucial role in the EMV calculation by determining the likelihood of each outcome occurring. The higher the probability of an outcome, the more impact it has on the overall EMV of a project.

What does the video suggest about the decision-making process when using risk analysis tools?

The video suggests that using risk analysis tools, such as EMV and Decision Trees, helps decision-makers choose projects with the most favorable risk-return balance, guiding them towards options with higher chances of success.