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306 Risk and uncertainty management
Cumulative probability
1
0.8
0.6
0.4
0.2
0
Original
−5 0 5 10
Profit $m
After risk
management
Figure 11.5 – The effectiveness of risk management measures
to accept these risks passively, can use the decision model to provide a
structured approach to identifying where effort should be invested in
creating strategies that reduce risks and improve payoffs. The use of
creativity techniques like brainstorming can complement decision analysis
by generating imaginative ideas for reducing risk and identifying
opportunities from management teams. Once generated, these ideas can
then be evaluated using the structure provided by decision analysis.
The benefits of this structured approach to risk management can be
significant and the resulting courses of action can lead to much greater
returns.
Exercise
(1) The AB Charity is planning its annual campaign to raise money.
This year three alternative methods are being considered: (i) street
collections, (ii) a television advertising campaign and (iii) a directmail
appeal. After using simulation to assess the risk associated with
the alternatives the charity’s managers have opted for a direct-mail
appeal.
The direct-mail appeal will involve sending out 343 000 letters to
selected people. To encourage donation these will include a free
ballpoint pen displaying the charity’s logo and people not replying
after three weeks will receive a reminder. While the fixed costs of
the campaign and the cost of sending out each letter and reminder
are known for certain the charity’s managers have had to estimate
probability distributions for the following four factors: