Risk and uncertainty exist in any proposal where the desired outcomes cannot be predicted with complete confidence. This paper outlines different approaches to addressing risk and uncertainty in economic assessments, such as cost-benefit analysis. It is intended to support analysts specifically undertaking economic assessment, such as for business cases, policy analysis and regulatory impact analysis. The paper outlines the various tools and approaches available and discusses their use. The basics What are risk and uncertainty? Risk and uncertainty exist in any proposal where the desired outcomes of the policy or initiative cannot be predicted with complete confidence. This could be because some of the influencing factors vary widely or there are many interactions that could impact on how things play out. Together, risk and uncertainty capture the degree to which the future is unknown. While in most cases the and be used interchangeably, they refer terms ‘risk’ ‘uncertainty’ can to slightly different the concepts. DTF’s Economic Evaluation technical guide (2013) explains difference: Risk exists when a potential event or outcome can be identified and estimated with a certain degree of confidence, i.e. can be given a probability. Risk is expressed as the outcome given the probability and impact of the event based on data and ‘expected of common risks are economic, environmental, political, expert judgment’. Examples construction and technology risks. Uncertainty exists when the event cannot be reasonably identified or the probability of an event occurring is unknown. Forecasts (e.g. of population, economic growth, and transport demand), assumptions, judgements and conditional outcomes in investment projects often involve uncertainty. Risks usually apply to the delivery of a project, for example: the risk that the loss of key staff leads to delays in project implementation, which means that key project milestones are missed the risk that commodity prices are higher or lower than forecast, which means that actual constructions costs are different to estimated costs the risk of the discovery of environmental hazards, such as soil contamination, asbestos etc. which may affect project budget and delivery timelines.
Risk and uncertainty exist in any proposal where the desired outcomes cannot be predicted with complete confidence. This paper outlines different approaches to addressing risk and uncertainty in economic assessments, such as cost-benefit analysis. It is intended to support analysts specifically undertaking economic assessment, such as for business cases, policy analysis and regulatory impact analysis. The paper outlines the various tools and approaches available and discusses their use. The basics What are risk and uncertainty? Risk and uncertainty exist in any proposal where the desired outcomes of the policy or initiative cannot be predicted with complete confidence. This could be because some of the influencing factors vary widely or there are many interactions that could impact on how things play out. Together, risk and uncertainty capture the degree to which the future is unknown. While in most cases the terms ‘risk’ and ‘uncertainty’ can be used interchangeably, they refer to slightly different concepts. DTF’s Economic Evaluation technical guide (2013) explains the difference: Risk exists when a potential event or outcome can be identified and estimated with a certain degree of confidence, i.e. can be given a probability. Risk is expressed as the ‘expected outcome given the probability and impact of the event based on data and expert judgment’. Examples of common risks are economic, environmental, political, construction and technology risks. Uncertainty exists when the event cannot be reasonably identified or the probability of an event occurring is unknown. Forecasts (e.g. of population, economic growth, and transport demand), assumptions, judgements and conditional outcomes in investment projects often involve uncertainty. Risks usually apply to the delivery of a project, for example: the risk that the loss of key staff leads to delays in project implementation, which means that key project milestones are missed the risk that commodity prices are higher or lower than forecast, which means that actual constructions costs are different to estimated costs the risk of the discovery of environmental hazards, such as soil contamination, asbestos etc. which may affect project budget and delivery timelines.
Guidance-on-addressing-risk-and-uncertainty-internet1.docx