METHODS OF QUALITATIVE AND QUANTITATIVE RISK ANALYSIS - Научное сообщество
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Рік заснування видання - 2011

METHODS OF QUALITATIVE AND QUANTITATIVE RISK ANALYSIS

11.01.2025 20:23

[2. Экономические науки]

Автор: Nadiia Ragulina, Associate Professor of the Department of Digital Technologies and Design and Analytical Solutions, LLC “Technical University “Metinvest Polytechnic”



Risk analysis is a component of the theory and practice of risk management. The need for this analysis for enterprises is associated with the instability of technological, natural, economic and political processes, their negative impact on the functioning of business entities, the possibility of unfavourable development scenarios that lead to deviations from the actual result of work from the expected one and affect the effectiveness of decisions.

The modern risk analysis methodology combines complementary quantitative and qualitative approaches. Risk assessment is a quantitative or qualitative determination of the magnitude (degree) of risks - one of the stages of risk analysis. 

Qualitative risk assessment is the process of presenting a qualitative analysis of the identification of risks that require a quick response. Such a risk assessment determines the degree of importance of the risk and chooses the method of response. The main purpose of this assessment method is to identify the main types of risks affecting the business. The advantage of this approach is that at the initial stage of analysis, it is possible to visually assess the degree of riskiness by quantifying the composition of risks and, at this stage, to refuse to implement a certain decision.

A qualitative risk analysis helps to identify and identify possible types of risks inherent in the project, identify and describe the causes and factors that affect the level of a particular type of risk. In addition, it is necessary to describe and evaluate all possible consequences of the hypothetical implementation of the identified risks and propose measures to minimise and/or compensate for these consequences by calculating the cost of these measures. The objective of a qualitative risk analysis is to identify sources and causes of risk, stages and activities that pose a risk, namely: to identify potential risk areas; to identify risks that accompany the activity; to forecast practical benefits and possible negative consequences of the identified risks. The main results of a qualitative risk analysis include: identification of specific risks of an investment project and the reasons that cause them; analysis and cost equivalent of the hypothetical consequences of the possible realisation of these risks; proposals for measures to minimise losses and their cost assessment. Additional, but also very significant results of qualitative analysis include determining the boundary values of possible changes in all factors (variables) of the project being tested for risk [1, p. 803-810]. In modern conditions, the following stages of qualitative risk analysis can be identified:

1) identification (definition) of possible risks; 

2) description of the possible consequences (losses) of the identified risks and their cost assessment; 

3) a description of possible measures aimed at reducing the negative impact of the identified risks, indicating their cost; 

4) a qualitative study of the investment project's risk management capabilities (which include: risk diversification; risk avoidance; risk compensation; risk localisation). 

A qualitative analysis of investment risks is carried out at the stage of developing a business-plan, and a mandatory comprehensive examination of the entire project makes it possible to prepare a large amount of information in order to start working on risk analysis [2, p. 147]. Qualitative assessment includes the expert method, the cost-benefit analysis method, and the analogy method. The expert method involves processing the assessments of experts with experience in implementing innovative projects for each type of risk and determining the integral risk level. The most common expert assessment methods include the Delphi method, scoring method, ranking, and pairwise comparison. The expert assessment method is implemented by processing the opinions of experienced professionals who act as experts. Each expert, working separately, is given a list of possible risks and asked to assess the likelihood of their occurrence. The experts’ assessments are then analysed for inconsistencies, and they must satisfy the following rule: the maximum difference between the assessments of two experts for any type of risk should not exceed 50%, which helps to eliminate fundamental differences in the experts’ assessments of the probability of a particular type of risk. As a result, expert estimates of the probability of an acceptable critical risk, or estimates of the most likely losses, are obtained. The correct selection of experts is of great importance in this method. Expert assessment methods include a set of logical, mathematical and statistical methods and procedures related to the expert's activities in processing information required for analysis and decision-making. At the heart of the expert procedure is the expert himself - a specialist who uses his abilities (knowledge, skills, experience, intuition, etc.) to find the most effective solution. Experts involved in risk assessment should: have access to all information available to the developer about the project; have a sufficient level of creative thinking and the necessary knowledge in the relevant subject area; be free from personal preferences regarding the project (i.e. not lobbying for it). In its most general form, the essence of this method is that an entity identifies a certain group of risks and considers how they may affect its operations. This consideration is reduced to giving a score for the likelihood of a particular type of risk occurring, as well as the degree of its impact on the entire business. The main disadvantages of this method include difficulties in attracting independent experts and significant subjectivity of the assessments obtained. The method of analogy is applied both at certain stages of the project life cycle and throughout the entire cycle and is used to develop project implementation scenarios. The method of using analogues is to find and use similarities between phenomena, objects, and systems. It is often used in cases where it is not possible to use other risk assessment methods. The analogy method is most commonly used in risk assessment of frequently repeated projects. 

Thus, the advantages of qualitative assessment methods include the simplicity of calculations, the absence of the need for accurate information and the use of computers; these methods are also used when other assessment tools are not acceptable; these methods allow for possible errors, the effects of adverse factors and extreme situations as sources of potential risk; these methods can be used both at certain stages of the project life cycle and throughout the entire cycle.

Quantitative risk assessment provides the most accurate solutions compared to qualitative risk assessment. However, quantitative assessment also faces the greatest difficulties, which are related to the fact that quantitative risk assessment requires appropriate initial information. The quantitative risk assessment is proposed to be based on the methodology used in audits, namely, risk assessment by control points of activity. The use of this method, as well as the results of qualitative analysis, allows for a comprehensive risk assessment. Quantitative risk assessment is based on the data obtained during their qualitative assessment, i.e. only those risks that are present in the implementation of a specific operation of the decision-making algorithm should be assessed. Quantitative analysis of project risks involves the numerical determination of the values of individual risks and the project risk in general. Quantitative analysis is based on probability theory, mathematical statistics, and operations research theory. Two conditions are necessary for quantitative analysis of project risks: the availability of a basic project calculation and a full-fledged qualitative analysis. Qualitative analysis identifies and identifies possible types of project risks, identifies and describes the causes and factors that affect the level of each type of risk [3, p. 32-35]. The objective of quantitative analysis is to quantify the impact of changes in project risk factors on project performance criteria. The most commonly used methods of quantitative project risk analysis in practice are as follows: 

- method of adjusting the discount rate; 

- sensitivity analysis of performance indicators (net discounted income, internal rate of return, profitability index, etc;) 

- scenario method; 

- decision tree; 

- simulation modelling - Monte Carlo method. 

These risk analysis methods are based on the concept of the time value of money and probabilistic approaches. The choice of a specific method of investment risk analysis, in our opinion, depends on the information base, requirements for the final results (indicators) and the level of reliability of investment planning. For small projects, you can limit yourself to methods of sensitivity analysis and discount rate adjustment, for large projects - to conduct simulation modelling and build probability distribution curves, and if the project results depend on the occurrence of certain events or the adoption of certain decisions, build a decision tree. Risk analysis methods should be applied in a comprehensive manner, using the simplest ones at the preliminary assessment stage, and complex methods that require additional information at the final investment justification stage. It should be noted that the results of different methods used for the same project complement each other. At the stage of quantitative risk analysis, numerical values of the probability of occurrence of risk events and the amount of damage or benefit caused by them are calculated [4, p. 97]. As a result of the analysis of the entire set of modern methods of quantitative risk analysis, it can be said that the application of a particular method depends on many factors: 

- each type of risk under analysis has its own methods of analysis and specific features of their implementation; 

- the volume and quality of the initial data plays a significant role in risk analysis; 

- when analysing risks, it is fundamentally important to take into account the dynamics of indicators that affect the level of risk; 

- when choosing analysis methods, one should take into account not only the depth of the calculated data,

Simulation modelling (Monte Carlo method) is a series of numerous experiments designed to obtain empirical estimates of the degree of influence of various factors (input values) on some results (indicators) dependent on them. The method will make it possible to assess the impact of simultaneous changes in the values of several output parameters on the value of the object. In this case, the investor is provided with a complete set of data characterising the project risk. However, the system is not protected from contradictions, interconnected phenomena and forecast errors; expected probability distributions are built using expert information, so the complexity of calculations is not always accompanied by an adequate increase in their accuracy. The scenario method involves forecasting options for the development of the external environment and calculating investment performance estimates for each scenario. If certain probabilities are assigned to the scenarios, a risk profile can be built, and the standard deviation and skewness of the distribution can be estimated. Often, so-called ‘pessimistic’, ‘most likely’ and ‘optimistic’ scenarios are developed to provide an estimate of the spread of project results and its profitability (loss) in the event of a deteriorating economic situation. The method of building a decision tree is similar to the scenario method and is based on building a multivariate forecast of the dynamics of the external environment. Unlike the scenario method, it assumes that the organisation itself can make decisions that change the course of project implementation (making choices) and a special graphical form of representing the results (the ‘decision tree’). ‘The decision tree can be used both in conditions of risk and in conditions of uncertainty or complete certainty. Building a probability tree is a technique that allows you to visualise the logical structure of decision-making. A probability tree makes it possible to accurately determine the likely future cash flows of an investment project depending on the results obtained in previous periods. As a rule, there is a connection between what has happened now and what will happen in the future, but this is not always the case. If an investment project generates positive cash flows in the first period, then in the next period, the cash flow may have different values with corresponding opportunities. A probability tree can be used to represent future events as they may occur. The disadvantages of the probability tree method of risk assessment are its labour intensity and the lack of consideration of the impact of environmental factors.

Qualitative and quantitative risk assessment can be used separately or together, depending on the available time and budget, the need for quantitative or qualitative risk assessment. A risk is an action performed under conditions of choice, when in case of failure there is a possibility (degree of danger) of being in a worse position than before the choice (than in case of failure to perform this action). In our opinion, this definition is the most complete and reflects the essence of risk. Investing in the development of enterprises involves the risk of not getting the expected results in the desired timeframe. In order to survive in a market economy, companies need to decide to introduce technical innovations and take bold, non-trivial actions, which increases risk. In this regard, there is a need to analyse and assess the degree of investment risk so that potential investors, including the company planning the project, can have a clear picture of the real prospects for return on investment and profit in advance, even before making investments. It follows that businesses need to be able to manage risk in the process, striving to reduce it to the lowest possible level.

Correctly obtained risk assessments are valuable not so much in themselves as in connection with the need to make economic decisions in specific situations. At the current stage of development, a number of factors can be influenced in real investments: the nature of the technology, the production of goods, the structure of the enterprise and methods of managing the production of goods, the qualifications of management, etc. Thus, for effective risk management, it is important that all possible factors affecting the overall level of risk are identified, analyzed and ranked by importance in accordance with existing methods of qualitative and quantitative risk analysis

Література

1. Sandra M.N., Sandra M.N., Carlos S. da S. Eduardo Risk management applied to software development projects in incubated technology-based companies: literature review, classification, and analysis. 2016. № 23(4). P. 798-814.

2. Yet B., Constantinou A., Fenton N., Neil M., Luedeling E., Shepherd K. A Bayesian Network Framework for Project Cost, Benefit and Risk Analysis with an Agricultural Development Case Study. Expert Systems with Applic. 2016. № 60. P. 141–155.

3. Tavares B. G., C. Eduardo S. da Silva, A. D. de Souza. Risk Management in Scrum Projects: A Bibliometric Study. Journal of communications software and systems. 2017. №13(1). P. 25-41.

4. Rudnitska Y. Features of risk management in the foreign economic activity of the enterprises. Збірник тез доповідей І Міжнародної науково-практичної конференції «Бізнес, інновації, менеджменту: проблеми та перспективи», Київ, 23 квітня 2020 року, с. 96-97 



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