Mexican Vacation and Value of Qualitative Risk Analysis

Here is a situation. You are travelling to a Mexican resort for a vacation. You are thinking about what you should prepare for your trip. For example:

– Should I exchange some local currency in advance?

– Should I take snorkeling gear from home or rent it locally?

– Should I take a first aid kit with me or will it be easily available at the resort?

– Should I buy travel insurance?

MexicanVacation

All these questions are related to risks. For example, the risk of renting snorkeling gear being too expensive at the resort or is the risk of a higher currency exchange rate at the resort higher than in your home town? You cannot mitigate all of the risks: it may be too expensive. For example: you can take snorkeling gear with you, and pay the airline for extra luggage. Therefore, you need to prioritize risks and mitigate only those which are most critical.

This can be performed using an approach called qualitative risk analysis. Basically you need to grade probability and impact for each risk, then multiply that sum with each other and calculate the score. At that point, you can rank the risks based on these scores. This analysis is qualitative because you don’t calculate probabilities and impacts using a projected algorithm, rather you come up with probabilities and impacts based on your experience. Research done by psychologists shows that expert judgment can be very accurate as long as it is properly elicited, in other words if you ask an expert (in this case yourself) the correct questions.

Obviously you are not going to perform formal risk analysis for a trip to Mexico, nonetheless, you may construct a simplified and perhaps intuitive risk analysis exersise. For actual projects at work however, you may need to perform formal qualitative risk analysis. In real life projects, risks can have an exceptionally significant impact. Risk mitigation and risk response can cost you a lot of money.

The main question is, “is there any value in qualitative risk analysis or is it just a burden?” Qualitative risk analysis is mostly a mental exercise. Risk identification, assessment of risk probabilities and impact makes you think about three main questions:

– What can happen?

– How will it impact what I’m doing?

– What do I to about it?

People make wrong choices simply because they don’t ask themselves these questions or if they do, they don’t allocate adequate mental effort in to thinking through these questions. For example, people tend to forget something or are overoptimistic in assessing future risks. The value of formal qualitative risk analysis is to help people to understand the implications of what they are going.