Yacov Y Haimes Systemsbased risk analysis Introduction

Risk models provide the roadmaps that guide the analyst throughout the journey of risk assessment, if the adage 'To manage risk, one must measure it' constitutes the compass for risk management. The process of risk assessment and management may be viewed through many lenses, depending on the perspective, vision, values, and circumstances. This chapter addresses the complex problem of coping with catastrophic risks by taking a systems engineering perspective. Systems engineering is a multidisciplinary approach distinguished by a practical philosophy that advocates holism in cognition and decision making. The ultimate purposes of systems engineering are to (1) build an understanding of the system's nature, functional behaviour, and interaction with its environment, (2) improve the decision-making process (e.g., in planning, design, development, operation, and management), and (3) identify, quantify, and evaluate risks, uncertainties, and variability within the decision-making process.

Engineering systems are almost always designed, constructed, and operated under unavoidable conditions of risk and uncertainty and are often expected to achieve multiple and conflicting objectives. The overall process of identifying, quantifying, evaluating, and trading-off risks, benefits, and costs should be neither a separate, cosmetic afterthought nor a gratuitous add-on technical analysis. Rather, it should constitute an integral and explicit component of the overall managerial decision-making process. In risk assessment, the analyst often attempts to answer the following set of triplet questions (Kaplan and Garrick, 1981): 'What can go wrong?', 'What is the likelihood that it would go wrong?', and 'What are the consequences?' Answers to these questions help risk analysts identify, measure, quantify, and evaluate risks and their consequences and impacts.

Risk management builds on the risk assessment process by seeking answers to a second set of three questions (Haimes, 1991): 'What can be done and what options are available?', 'What are their associated trade-offs in terms of all costs, benefits, and risks?', and 'What are the impacts of current management decisions on future options?' Note that the last question is the most critical one for any managerial decision-making. This is so because unless the negative and positive impacts of current decisions on future options are assessed and evaluated (to the extent possible), these policy decisions cannot be deemed to be 'optimal' in any sense of the word. Indeed, the assessment and management of risk is essentially a synthesis and amalgamation of the empirical and normative, the quantitative and qualitative, and the objective and subjective efforts. Total risk management can be realized only when these questions are addressed in the broader context of management, where all options and their associated trade-offs are considered within the hierarchical organizational structure. Evaluating the total trade-offs among all important and related system objectives in terms of costs, benefits, and risks cannot be done seriously and meaningfully in isolation from the modelling of the system and from considering the prospective resource allocations of the overall organization.

Theory, methodology, and computational tools drawn primarily from systems engineering provide the technical foundations upon which the above two sets of triplet questions are addressed quantitatively. Good management must thus incorporate and address risk management within a holistic, systemic, and all-encompassing framework and address the following four sources of failure: hardware, software, organizational, and human. This set of sources is intended to be internally comprehensive (i.e., comprehensive within the system's own internal environment. External sources of failure are not discussed here because they are commonly system-dependent.) However, the above four failure elements are not necessarily independent of each other. The distinction between software and hardware is not always straightforward, and separating human and organizational failure often is not an easy task.

Nevertheless, these four categories provide a meaningful foundation upon which to build a total risk management framework.

In many respects, systems engineering and risk analysis are intertwined, and only together do they make a complete process. To paraphrase Albert Einstein's comment about the laws of mathematics and reality, we say: 'To the extent to which risk analysis is real, it is not precise; to the extent to which risk analysis is precise, it is not real'. The same can be applied to systems engineering, since modelling constitutes the foundations for both quantitative risk analysis and systems engineering, and the reality is that no single model can precisely represent large-scale and complex systems.

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