Understanding Risk Attitude in a Scrum Environment

September 24, 2020
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To ensure viability, desirability, and achievability of the project’s business justification, it is important that risks are managed effectively. Risk management focuses on identifying all the inherent risks, assessing their probability, proximity, & impact, prioritizing and mitigating them to increase the probability of project success.

Risks are the uncertainties related to a project that could significantly alter the outcome of the project in a positive or negative way. Since risks are future uncertainties, they have no current impact on the project, but could have a potential impact on the future.

Stakeholders include all people or organizations impacted by the project as well as those that have the ability to impact the project. It is important to understand the risk attitude of the stakeholders.

Let us take a look at the three factors that influence risk attitude:

  1. Risk appetite: This refers to how much uncertainty the stakeholder or organization is willing to take on.
  2. Risk tolerance: This indicates the degree, amount, or volume of risk stakeholders will withstand.
  3. Risk threshold: This refers to the level at which a risk is acceptable to the stakeholder organization. A risk will fall above or below the risk threshold. If it is below, then the stakeholder or organization is more likely to accept the risk.

Essentially, the risk attitude of the stakeholders determines how much risk the stakeholders consider acceptable and hence when they will decide to take actions to mitigate potential adverse impacts of risks. Therefore, it is important to understand the tolerance levels of the stakeholders in relation to various factors including cost, quality, scope, and schedule.

Utility Function is a model used for measuring stakeholder risk preference or attitude toward risk. It defines the stakeholders’ level or willingness to accept risk. The three categories of Utility Function are the following:

  1. Risk averse: Stakeholder is unwilling to accept a risk no matter what the anticipated benefit or opportunity.
  2. Risk neutral: Stakeholder is neither risk averse nor risk seeking and any given decision is not affected by the level of uncertainty of the outcomes. When two possible scenarios carry the same level of benefit, the risk neutral stakeholder will not be concerned if one scenario is riskier than the other.
  3. Risk seeking: Stakeholder is willing to accept risk even if it delivers a marginal increase in return or benefit to the project.

Hence, the goal of understanding risk attitude is to be prepared, with plans in place to deal with any risks that may occur.

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