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PRISM: improved risk management

Author

Listed:
  • Mauricio Moraes Davidovich
  • William K. Klimack

    (University of Oklahoma)

Abstract

Risk management is widely recognized as a valuable approach, and in almost all applications, to our knowledge, it is conducted using a risk matrix as the central tool. Until recent years, risk matrices were not examined for their efficacy in efficient risk reduction. Several authors examined risk matrices and found them flawed and we briefly review their findings. They instead recommended using traditional analytic techniques but did not offer clear guidance for those unfamiliar with these approaches. The intent of this paper is to provide improved risk management approaches that are both quickly accessible to the reader and efficiently implementable in organizations. In this paper, we define a heuristic approach and compare that to a typical risk matrix methodology using generated data to show improved performance. We also demonstrate that employment of optimization is both superior to the use of risk matrices and often improves recommendations developed with the heuristic. These approaches are simple to implement, and we have named them PRISM and PRISM + for clarity.

Suggested Citation

  • Mauricio Moraes Davidovich & William K. Klimack, 2022. "PRISM: improved risk management," SN Business & Economics, Springer, vol. 2(7), pages 1-25, July.
    • Handle: RePEc:spr:snbeco:v:2:y:2022:i:7:d:10.1007_s43546-022-00246-x
    DOI: 10.1007/s43546-022-00246-x
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    References listed on IDEAS

    as
    1. E.S. Levine, 2012. "Improving risk matrices: the advantages of logarithmically scaled axes," Journal of Risk Research, Taylor & Francis Journals, vol. 15(2), pages 209-222, February.
    2. Gilberto Montibeller & Detlof von Winterfeldt, 2015. "Cognitive and Motivational Biases in Decision and Risk Analysis," Risk Analysis, John Wiley & Sons, vol. 35(7), pages 1230-1251, July.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Risk management; Decision making; Decision analysis; Risk matrix; Process improvement;
    All these keywords.

    JEL classification:

    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • G3 - Financial Economics - - Corporate Finance and Governance
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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