Managing Risk in the Real World

Abstract

Exploitation by corporate management of what we know about decision analysis and simulation techniques is not limited by an understanding of the relevant analytical frameworks or the availability of the computer programs necessary for data manipulations. Rather, effectively utilizing the power of these concepts is inhibited by our inability to weave them into the fabric of the real management systems and decision-making processes of the firm. Texts on decision analysis often belabor the unwillingness on the part of management to employ these sophisticated tools. Management, on the other hand, is neither enchanted nor convinced by the 'black boxes' (which are perceived as black magic) of the decision analyst. This paper will not argue the merits of where the responsibility lies. Rather, it will present a method for effectively integrating decision and simulation analysis into the real strategic decision-making process that actually exists within the firm. At least, the capability of employing such a method is now under our control; the author argues that if it is effected, then exploitation of these powerful analytical approaches by management can follow. Specifically, we will deal here with the application of decision analysis to the management of risk and return in petroleum exploration. This is in itself an important application of great practical significance. However, the principles illustrated through this example are widely applicable to many other areas. It is especially applicable to areas where risks are great and uncertainties are large. Such areas would include research, the marketing of new products, and proposed large capital projects. Therefore, careful attention will be given to the underlying principles involved, and to the implications of applying these principles in other areas. [ABSTRACT FROM AUTHOR]