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 [email protected] or (972)
883-6117. To learn more about the International Center for
Decision and Risk Analysis, go to www.som.utdallas.edu/icdria.