You are here

Uncertainty & Risk of Deferral - Interactive Demo

Most tools for project valuation have shortcomings that make them incapable of accurately prioritizing projects. A key source of error is accounting for risk and incorporating risk into the valuation method.

This demo illustrates the importance of accounting for risk when estimating project value. However it does not demonstrate how to incorporate risk into the valuation method - that is a separate topic. Suffice it to say that project value and risk cannot be separated - project risk is fundamentally linked with the value of a project.

For estimating project value, this demo illustrates the error that is made when unlikely but risky events are not incorporated into the project valuation.

Click Run Model to run the model then follow the directions below.

Click New Portfolio to generate and prioritize 30 random projects. The projects are displayed as an efficient frontier. Click any dot to see the corresponding project Data.

Circles indicate projects whose only risk is project risk. Project risk refers to the risk that the project may fail to deliver its promised benefits. Project risk decreases the value of a project.

Squares indicate deferral risk is the dominant risk. Deferral risk refers to the potential for losses to the business if the project is delayed. Deferral risk increases the value of a project.

More serious risk.

Risk seriousness and the necessary value adjustment depend on the organization's risk tolerance. Select Tools > Set Risk Tolerance to change tolerance for risk.

Click Adjust for Risk to see the impact of correctly valuing project and deferral risk. Notice the dramatic change (unless risk tolerance is very high) to project priorities as well as the impact on the value of the project portfolio!

Inadequate quantification of the uncertainties of the impacts of project deferral and the associated risks is a major reason that organizations defer needed investment in infrastructure and choose the wrong projects.