New ideas about how to

conceptualise, asses and

manage risk

Terje Aven

University of Stavanger, Norway

13 March 2014

Risk Management

Network

Kahneman

asserts that we

have a basic lack

of ability to treat

small risks: we

either ignore

them completely

or give them too

much weight. The

main thesis put

forward is that

we grossly over-

estimate small

risks.

Kahneman’s

book

«Thinking

fast and

slow»

I visited Israel several times during a period in

which suicide bombings in buses were relatively

common—though of course quite rare in

absolute terms. There were altogether 23

bombings between December 2001 and

September 2004, which had caused a total of

236 fatalities. The number of daily bus riders in

Israel was approximately 1.3 million at that time.

For any traveler, the risks were tiny, but that was

not how the public felt about it. People avoided

buses as much as they could, and many

travelers spent their time on the bus anxiously

scanning their neighbors for packages or bulky

clothes that might hide a bomb.

I did not have much occasion to travel on buses, as I was

driving a rented car, but I was chagrined to discover that my

behavior was also affected. I found that I did not like to stop

next to a bus at a red light, and I drove away more quickly

than usual when the light changed. I was ashamed of myself,

because of course I knew better. I knew that the risk

was truly negligible, and that any effect at all on my actions

would assign an inordinately high “decision weight” to a

minuscule probability. In fact, I was more likely to be injured

in a driving accident than by stopping near a bus. But my

avoidance of buses was not motivated by a rational concern for

survival. What drove me was the experience of the moment:

being next to a bus made me think of bombs, and these

thoughts were unpleasant.

Risk

• What is Risk ?

• Value-at-risk - VaR

• Uncertainty

• variance or volatility

• The Knightian classification where

risk is restricted to known

distributions also has a strong

position in the economic literature,

and this classification is often

referred to when economists

present and discuss the risk

concept.

• Risk = expected

consequences ?

Risk

P X C

x

Industry safety contexts

• Events/scenarios A, consequences C,

probabilities P

Risk

(C,P)

(A,C,P)

• Risk is a measure of the probability and severity of

adverse effects (Lowrance 1976)

• Risk is the combination of probability and extent of

consequences (SEVESO, Ale 2002).

• Risk is defined as the triplet (s,p,c), where s is the

scenario, p probability and c consequence of the

scenario (Kaplan and Garrick 1981)

(A,C,P)

A: Event, C: Consequences of A,

P: probability

(C,P)

• The perspective is too narrow !

John offers you a game: throwing

a die

• ”1,2,3,4,5”: 6

• ”6”: -24

What is your risk?

Risk

(C,P):

• 6 5/6

• -24 1/6

Is based on an important

assumption – the die is fair

Assumption 1: …

Assumption 2: …

Assumption 3: …

Assumption 4: …

…

Assumption 50: The platform jacket structure will withstand

a ship collision energy of 14 MJ

Assumption 51: There will be no hot work on the platform

Assumption 52: The work permit system is adhered to

Assumption 53: The reliability of the blowdown system is p

Assumption 54: There will be N crane lifts per year

…

Assumption 100: …

…

“Background knowledge”

Model: A very crude gas dispersion model is applied

Main problems with the probability

based approach

19

4

Surprises occur

1

Assumptions can

conceal important

aspects of risk and

uncertainties

3

The probabilities

can be the same

but the

knowledge they

are built on

strong or weak

2

Presume

existence of

probability

models

Probability-

based

Historical data

Knowledge

dimension +

+

Surprises

Risk perspective

Risk

C: Consequences

U: Uncertainty

(C,U)

Risk

(A,C,U)

A: Event, C: Consequences

U: Uncertainty

Risk description

(A,C,U)

Q: Measure of uncertainty (e.g. P)

K: Background knowledge

C’: Specific consequences

(C,U)

C’

Q

K

Black Swan

A surprising, extreme event

relative to present

knowledge/beliefs

Aven (2013) On the

meaning of a black swan

in a risk context. Safety

Science, 57, 44-51

A surprise for

some

Not a

surprise

for others Unknown

knowns

Was this a Black

Swan ?

Black Swan

I. Outlier as it lies outside the realm of regular

expectations, because nothing in the past can

convincingly point to its possibility.

II. Extreme impact.

III. In spite of its outlier status, human nature makes us

concoct explanations for its occurrence after the fact,

making it explainable and predictable.

Was this a Black

Swan?

Known events

Judged

acceptable

So small

probability

Black swans

Unforeseen

(unanticipated)

events

Surprising events

Unthinkable

(unimaginabl

e) events

Extreme

consequences

a) Unknown

unknowns

b)

Unknown

knowns

c) Known but not

believed to occur

because of low

judged probability

Was this a Black

Swan?

The Deepwater Horizon accident

Erroneous assessments of pressure test results

Failure to identify formation fluid penetrating the well

despite log data showing that this was happening

The diverter system was unable to divert gas

The cutting valve (blind shear ram – BSR) in the

BOP failed to seal the well

http://www.ptil.no/nyheter/deepwater-horizon-ulykken-

vurderinger-og-anbefalinger-for-norsk-petroleumsvirksomhet-

article7889-24.html

Disasters

• We experience combinations of conditions and events

which collectively result in a major accident

• We do not normally identify such combinations of

conditions and events in risk assessments – and, if

we did, they would typically be disregarded because of

negligible probability 33

A B C D

Black swans

Unforeseen

(unanticipated)

events

Surprising events

Unthinkable

(unimaginabl

e) events

Extreme

consequences

a) Unknown

unknowns

b)

Unknown

knowns

c) Known but not

believed to occur

because of low

judged probability

How to confront the black swans

Knowledge

Risk assessments

36

Probabilities,

historical data,

risk matrices

Knowledge,

uncertainty,

surprises

Traditional

understanding

of risk

Risk description

(A,C,U)

Q: Measure of uncertainty (e.g. P)

K: Background knowledge

C’: Specific consequences

(C,U)

C’

Q

K

Risk description

(A,C,U)

Black swan: A occurs, not covered by A’

(C,U)

A’. C’

Q

K

Risk description

(A,C,U)

Black swan: A’ known but judged so unlikely

that we believe it will not occur

A’ occurs

(C,U)

A’. C’

Q

K

• How can we improve the way we

assess and manage risk and black

swans ?

Probability

Consequence,

impact

Poor background knowledge

Strong background knowledge

Medium strong background knowledge

– Anticipatory failure determination (AFD) based

on Theory of Inventive Problem Solving (TRIZ)

• If I wanted to create this particular failure, how

could I do it?

– Events with negligible assessed risks: Provide

arguments for the event to occur (red team)

Challenge analysis conducted

– Red teaming (devil’s advocate) (challenges

our mental models)

– Scenario analysis (starting from a future

imagined state – system thinking)

Improved risk assessments?

How to confront the black swans

Risk management approaches

• Signals and warnings

• Sensitivity to operations (principle of collective

mindfulness linked to High Reliability Organizations)

• Adaptive risk management

• Robustness

• Resilience thinking

• Understand variation

• …

Cautionary and precautionary principles

The perfect storm

«Perfect

storms»

Different types of risk

problems

Increasing weight on the cautionary

and precautionary principles

«Perfect

storms»

Different types of risk

problems

Increasing weight on the cautionary

and precautionary principles

Formula Optimal/right

decision

Common thinking

Risk-based decision making

Risk analysis

Cost-benefit analysis,

Risk acceptance criteria

…

Management

review and

judgment Decision

Analysis Management

Risk-informed decision

making

Aven, T. (2012) The risk concept. Historical and recent development

trends. Reliability Engineering and System Safety, 99, 33–44.

Aven, T. Krohn, B.S. (2014) A new perspective on how to understand,

assess and manage risk and the unforeseen“. Reliability

Engineering & System Safety.

http://www.sciencedirect.com/science/article/pii/S0951832013002159

#

Aven (2014) Risk, surprises and black

swans. Routledge, in press.

• Extra

New risk

perspective

1

Risk

assessment

and

management

2

Mindfulness

(Collective)

2

Quality

improvements

1

Suitable

concepts and

principles

More specific insights about

knowledge, uncertainties, variation

and surprises

Collective mindfulness

• Preoccupation with failure

• Reluctance to simplify

• Sensitivity to operations

• Commitment to resilience

• Deference to expertise

Organisational theory and

learning

2

New risk

perspective

• ------ P =1 x 10-4

Risk description What is acceptable

risk

• ------ P =1 x 10-4

Risk description What is acceptable

risk

Problems with this

approach?

An effect is a deviation from the

expected (positive and/or negative).

Risk is the effect of uncertainty on

objectives

ISO Guide 73 / ISO 31000

Aven, T. (2011) On the new ISO guide

on risk management terminology.

Reliability Engineering and System

Safety, 96, 719-726