Resources - Risk Management

Definition of Risk-based Decision Making

The best place to begin this Introduction to Risk-based Decision Making is with the definition of risk-based decision making.

A process ...

Risk-based decision making involves a series of basic steps. It can add value to almost any situation, especially when the possibility exists for serious or catastrophic outcomes. The steps can be used at different levels of detail and with varying degrees of formality, depending on the situation. The key to using the process is in completing each step in the most simple, practical way to provide the information the decision maker needs. Some situations are so complex that detailed risk assessments are needed, but most can be addressed with more simple risk assessments.

... that organizes information about the possibility for one or more unwanted outcomes ...

This information about the possibility for one or more unwanted outcomes separates risk-based decision making from more traditional decision making. The consideration of possible losses for any set of stakeholders is unique to risk-based decision making. These losses can include such things as harmful effects on safety and health, the environment, property loss, or mission success. The risks for an engineered system or activity are determined by the types of possible losses, the frequency at which they are expected to occur, and the effects they might have. Although not certain, these possible losses present real risks that must be considered in most decision-making processes.

... into a broad, orderly structure ...

Most decisions require information not only about risk, but about other things as well. This additional information can include such things as cost, schedule requirements, and public perception. In risk-based decision making, all of the identifiable factors that affect a decision must be considered. The factors may have different levels of importance in the final decision. Therefore, an orderly decision analysis structure that considers more than just risk is necessary to give decision makers the information needed to make smart choices.

... that helps decision makers ...

The only purpose of risk-based decision making is to provide enough information to help someone make a more informed decision. The process focuses on organizing information for logical understanding. It does not replace the decision maker. Neither should it force the decision maker into burdensome risk assessments to gather information that is either irrelevant to the decision or too late to affect it.

... make more informed management choices

The goal of risk-based decision making is to help people make better, more logical choices without complicating their work or taking away their authority. A good decision made quickly is much better than a perfect decision made too late. Also, a good decision does not always result in a good outcome. The best we can hope for is to equip intelligent decision makers with good information based on a number of decision factors and the interests of stakeholders. On average, and over time, good decisions made through this process should provide the best outcomes. They will also provide logical explanations for decisions when the outcomes are not favorable.

Do You Need Risk-based Decision Making?

We make hundreds of risk-based decisions every day:

  • Should I change lanes on the interstate?
  • How often should I change the oil in my car?
  • What can I do to lower my risk of cancer?
  • Can I put off this task until later without affecting my project?

For almost every decision, there is a chance for some unwanted outcome. We include this possibility in our decisions, along with the consequences of the unwanted outcomes and the effort that would be needed to make the unwanted outcomes less likely or less severe.

Informal risk-based decision making

For most of our decisions, we do not formally assess the likelihood and consequences of possible unfortunate outcomes. For example, we do not study traffic statistics before changing lanes. Instead, we rely on our feel for the situation to create a level of comfort. If we are uncomfortable, we look for ways to change the situation to make ourselves more comfortable with the risks. For these types of decisions, the risk-based decision-making process takes place within seconds and becomes second nature.

Formal risk-based decision making

For some decisions, we are more formal about assessing the frequencies and consequences of possible unwanted outcomes. For example, when we decide how to provide for our families in case we are injured or killed, we rate a number of factors, including the following:

  • The possible losses we face (from short-term disabilities to death)
  • The chances of those losses
  • The economic consequences of those losses
  • The ways in which we can protect against the effects of the losses; for example, we can buy insurance
  • The acceptability of the risks and impacts of the protections; for example, can we afford the insurance or are we willing to give up certain extras?

The Risk-based Decision-making Process

Regardless of how formally you address risk-based decision making or the specific tools you use, risk-based decision making is made up of five major components, which are shown in the figure above.

Components of risk-based decision making

The following sections introduce the five components of risk-based decision making.

Step 1. Establish the decision structure

Understanding and defining the decision that must be made is critical. This first component of risk-based decision making is often overlooked and deserves more discussion. The following steps must be performed to accomplish this critical component:

Step 1a — Define the decision. Specifically describe what decision(s) must be made. Major categories of decisions include (1) accepting or rejecting a proposed facility or operation, (2) determining who and what to inspect, and (3) determining how to best improve a facility or operation.

Step 1b — Determine who needs to be involved in the decision. Identify and solicit involvement from key stakeholders who (1) should be involved in making the decision or (2) will be affected by actions resulting from the decision-making process.

Step 1c — Identify the options available to the decision maker. Describe the choices available to the decision maker. This will help focus efforts only on issues likely to influence the choice among credible alternatives.

Step 1d — Identify the factors that will influence the decisions (including risk factors). Few decisions are based on only one factor. Most require consideration of many factors, including costs, schedules, risks, etc., at the same time. The stakeholders must identify the relevant decision factors.

Step 1e — Gather information about the factors that influence stakeholders. Perform specific analyses (e.g., risk assessments and cost studies) to measure against the decision factors.

Step 2. Perform the risk assessment

Different types of risk are important factors in many types of decisions. Very simply, risk assessment is the process of understanding the following:

  • What bad things can happen
  • How likely they are to happen
  • How severe the effects may be

The bad things of interest can be safety and health losses, property losses, environmental losses, schedule impacts, political issues, etc.

Risk assessment can range from very simple, personal judgments by individuals to very complex assessments by expert teams using a broad set of tools and information, including historical loss data. The key to risk assessment is choosing the right approach to provide the needed information without overworking the problem. The following steps must be performed to asses risk:

Step 2a — Establish the risk-related questions that need answers. Decide what questions, if answered, would provide the risk insights needed by the decision maker.

Step 2b — Determine the risk-related information needed to answer the questions. Describe the information necessary to answer each question posed in the previous step. For each information item, specify the following:

  • Information type needed
  • Precision required
  • Certainty required
  • Analysis resources (staff-hours, costs, etc.) available

Step 2c — Select the risk analysis tool(s). Select the risk analysis tool(s) that will most efficiently develop the required risk-related information.

Step 2d — Establish the scope for the analysis tool(s). Set any appropriate physical or analytical boundaries for the analysis.

Step 2e — Generate risk-based information using the analysis tool(s). Apply the selected risk analysis tool(s). This may require the use of more than one analysis tool and may involve some iterative analysis (i.e., starting with a general, low-detail analysis and progressing toward a more specific, high-detail analysis).

Step 3. Apply the results to risk management decision making

One goal in most decision-making processes is to lower risk as much as possible. Sometimes the risk will be acceptable; at other times, the risk must change to become acceptable. To reduce risk, action must be taken to manage it. These actions must provide more benefit than they cost. They must also be acceptable to stakeholders and not cause other significant risks. The following steps must be performed to manage risk:

Step 3a — Assess the possible risk management options. Determine how the risks can be managed most effectively. This decision can include (1) accepting/rejecting the risk or (2) finding specific ways to reduce the risk.

Step 3b — Use risk-based information in decision making. Use the risk-related information within the overall decision framework to make an informed, rational decision. This final decision-making step often involves significant communication with a broad set of stakeholders.

Step 4. Monitor effectiveness through impact assessment

Impact assessment is the process of tracking the effectiveness of actions taken to manage risk. The goal is to verify that the organization is getting the expected results from its risk management decisions. If not, a new decision-making process must be considered.

Step 5. Facilitate risk communication

Risk communication is a two-way process that must take place during risk-based decision making. At every step in the process, encourage stakeholders to do the following:

  • Provide guidance on key issues to consider. Stakeholders identify the issues of importance to them. They present their views on how each step of the process should be performed, or at least provide comments on plans suggested by others.
  • Provide relevant information needed for assessments. Some or all of the stakeholders may have key information needed in the decision-making process.
  • Provide buy-in for the final decisions. Stakeholders should agree on the work to be done in each phase of the risk-based decision-making process. They can then support the ultimate decisions.

Source: USCG Risk-based Decision-making (RBDM) Guidelines.

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