Uncertainty in the financial markets is managed using derivatives, mainly optoins. If you are a pension fund manager who is worried that the stock markets could fall too far, you would buy a put option that creates a floor that limits your losses. Of course, the fund manager knows that the option will have a price that reduces his return but it is a cost worth paying to protect against a significant down side.
In financial markets, Risk is uncertainty about where prices might move. Risk is measured by a number of methods but it is managed with derivatives.
Risk on an (IT) project is also about uncertainty. All risks on IT projects can be expressed in terms of uncertainty of profit. Risks either result in delays to the project which delays benefit and hence reduces profit or they result in additional expense which also reduces profit.
Project managers should use options to manage their uncertainty. They should also acknowledge that they need to pay a premium for their options. The options might increase costs on a project but they will limit significant downsides.
Posted by chrismatts at May 8, 2004 6:59 PM