PMGT5891 Chap.1 Risk, Uncertainty and the Language of Risk
Risk, Uncertainty and the Language of Risk
This chapter sets out the vocabulary the rest of the unit depends on. It starts from the ISO 31000 statement that risk is the effect of uncertainty on objectives and compares it with the PMI wording that allows positive and negative effects. You will separate threats from opportunities, risks from issues, and certainty from measurable risk and from deeper uncertainty, using Knight's classic distinction and its critics.
The Week 2 Risk Arena game is then treated as a working model of probability times impact scoring, so you can decide when avoiding a risk is worth its price. The chapter closes with a short history of risk thinking drawn from Peter Bernstein.
What this chapter covers
- 01
ISO 31000: risk as the effect of uncertainty on objectives
- 02
PMI, Hillson and Baccarini wordings compared
- 03
Threats, opportunities and the two-sided view of risk
- 04
Risk versus issue: when certainty changes the label
- 05
Certainty, risk, uncertainty and ignorance as one spectrum
- 06
Knight's measurable versus unmeasurable distinction
- 07
Risk Arena: probability times impact scoring
- 08
Avoid or accept decisions against a fixed price
- 09
History of risk thinking from Against the Gods
Worked example · free
Pricing avoidance for four event risks
- +1Threat A: 0.5 x 8 = 4.0 expected loss, more than the 3 point price, so avoid and record -3.
- +1Threat B: 0.2 x 10 = 2.0 expected loss, less than 3, so accept and record -2.0.
- +1Opportunity C: 0.4 x 10 = 4.0 expected gain, more than the guaranteed 3, so accept and record +4.0.
- +1Opportunity D: 0.25 x 8 = 2.0 expected gain, less than 3, so decline it and bank +3.
- +1Net expected result: -3 - 2.0 + 4.0 + 3 = +2.0 points, against -4.0 - 2.0 + 4.0 + 2.0 = 0 if every risk were accepted.
Key terms
- Risk
- Risk is the effect of uncertainty on objectives, in the ISO 31000 wording, where the effect can be positive, negative or both.
- Issue
- An issue is a factor that is certain to happen or has already happened, so it is managed directly rather than registered as a risk.
- Opportunity
- An opportunity is an uncertain event or condition whose effect on an objective would be favourable if it occurred.
- Known unknown
- A known unknown is a foreseeable uncertainty that has been identified but whose outcome is not yet known, which Baccarini treats as risk proper.
- Risk score
- A risk score is the product of probability and impact, used in the Week 2 game to rank cards and compare them with the cost of a response.
Risk, Uncertainty and the Language of Risk FAQ
Is risk always negative in project management?
No. Both ISO 31000 and the PMI wording allow an effect to be positive or negative, so an uncertain event that could cut costs or speed delivery is also a risk in their wording. Some authors, Baccarini among them, reserve risk for downside and call the upside opportunity. Pick one convention, define it in your opening line, and keep it consistent.
What separates a risk from an issue?
Probability does. A risk still has some chance of not happening; an issue has a probability of 100 percent, either because it has occurred or because it is unavoidable. Issues move straight to an action plan and an owner, while risks are scored and then treated. A near impossible factor is usually left off the register altogether.
How did Frank Knight distinguish risk from uncertainty?
Knight argued in 1921 that risk can be measured because probabilities come from past data, which also makes it insurable, while uncertainty cannot be measured. Critics point out that project teams rely on subjective probabilities all the time, so under a strict reading almost nothing would count as risk. Quote both sides when you explain the distinction.
Why does the unit start with a card game?
The Risk Arena compresses the whole risk cycle into a few minutes: a card is drawn, its score is calculated, a response is chosen, the outcome is revealed and the budget changes. Playing it shows why a structured comparison of expected value against the price of a response beats gut feel, a lesson that returns in later weeks on treatment and decision trees.
Exam move
Start by writing the ISO 31000 definition from memory, then underline the two words that do the most work: uncertainty and objectives. Next, build a one-page table with four rows, certainty, risk, uncertainty and ignorance, and fill in a definition, a project example and the matching known or unknown label for each.
Practise the Week 2 arithmetic by drawing five random cards from a real deck, scoring each one and deciding avoid or accept against the 4 point price; aim to finish five cards in under three minutes. Finally, rehearse one short paragraph that contrasts the ISO, PMI and Baccarini wordings and states which you will use.
Revisit this chapter whenever a later topic, such as treatment or contingency, uses a word you cannot define in one sentence.
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