How the Calculation of the Risk's Expected Monetary Value Can Mislead Our Project Reserves

In this episode, Ricardo discusses the common practice of calculating Expected Monetary Value (EMV) for risk management. EMV involves multiplying the probability of a risk by its impact to determine the exposure and, in turn, the financial reserves needed. He points out that using EMV for risk reserves is only effective when managing a large portfolio of risks as an insurance company does. For small projects with just a few risks, relying on EMV is insufficient, and a different approach is needed. Ricardo suggests using more extreme scenarios, such as worst-case or best-case, depending on risk tolerance and project specifics. Large, complex projects, like nuclear power plants, require special consideration due to the potentially catastrophic impacts that may be financially unmanageable. Therefore, these projects are often funded by governments or large organizations. The key takeaway is that risk management involves more than just EMV calculations; it depends on the project's size and risk tolerance.