Decision and risk analysis Featured

8:00pm EDT October 26, 2007

Risk is inherent in many situations in both our professional and personal lives. Risk management helps organizations comply with regulations, monitor a wider range of emerging risks and make better decisions.

External risks are growing in importance in today’s world. “Risk management is becoming more strategic,” says Alain Bensoussan, Ph.D., distinguished research professor and director of the International Center for Decision and Risk Analysis at the School of Management, University of Texas at Dallas. “A more scientific approach is needed; new concepts and methods are necessary. When we know as much as possible about the probability of an event to occur, we can take the necessary actions to reduce the severity of the consequences.”

Smart Business asked Bensoussan about the emerging scientific field of Decision and Risk Analysis.

What new risks do we face?

Unfortunately, due to terrorist threats, in today’s world we face more security risks. We also face risks from natural disasters, such as Hurricane Katrina. Looking at business applications, corporations must deal with the reality of globalization. Their activity is less and less local. Markets and suppliers are located worldwide. Even R&D can be outsourced. The supply chain involves much more uncertainty and more complexity. Today, products are more and more embedded into services. They may perform better and make life easier, but they are more complex. In the future, we will see the process of the applications of nanotechnology, which raises many challenges. So we’re indeed expecting new risks. Of course, it is an evolution, a trend, and we have to adapt to this new situation.

Is decision and risk analysis a new scientific and academic topic?

Yes. If you have a common body of knowledge, concepts, methods and ideas with applications in many domains, then you have a science. But new science is not created from scratch. Decision and risk analysis as a new science has connections to many academic fields, in particular to economics and engineering. We can take the example of financial engineering. The techniques used on Wall Street are extremely sophisticated and complex, and they are based on deep economic and mathematical concepts. Insurance has also developed an advanced methodology called ‘actuarial science.’

What can practitioners expect from this new science?

Thanks to the body of knowledge, concepts, methods and ideas of decision and risk analysis, corporations and other entities facing risks will get useful tools to identify, assess and mitigate risk. In the context of a new science, one analyzes the types of problems to be solved obtaining a thorough understanding of them; then one develops the theory and its applications. What we can expect in the future is progress in quantifying risks. Moreover, this is extremely important to make optimal decisions. Quantifying is a key element of the scientific approach in general and for risk assessment and management in particular.

What industries can benefit the most?

Any industry can benefit, especially those with innovative, new products that require a high level of R&D and costly development. On complex projects, decision and risk analysis is indispensable. Supply chains that involve a great deal of uncertainty will also benefit. So the more complexity and uncertainty are present, the more risk is to be expected. One answer is to increase the flexibility as much as possible into the decision-making process. Risk management will provide tools to achieve this goal.

Are state departments and government agencies concerned?

Absolutely, by a lot of aspects. Government is responsible for mitigating the risks related to security and natural hazards. As another example, consider the areas of defense, energy and space. There are many large projects where government funding is involved. Decision and risk analysis tools will help in the design and development phases to stick with budgets and schedules and will provide estimates of the risk of drift. Another area is regulation. Governments regulate to mitigate financial risks in banks. Regulation in economic activity in general is necessary. To get to the right level of regulation and to define the right indicators strongly depends on an in-depth understanding of risk.

ALAIN BENSOUSSAN, Ph.D., is a distinguished research professor and director of the International Center for Decision and Risk Analysis at the School of Management, University of Texas at Dallas. Reach him at alain.bensoussan@utdallas.edu or (972) 883-6117. To learn more about the International Center for Decision and Risk Analysis, go to www.som.utdallas.edu/icdria.