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Topics: Risk Management
Why Expected Monetary Value?
Network:924



Expected Monetary Value (EMV) is probably the most used method for calculating the risk reserve. As the name says, it is an Expected value, meaning it is the most likely value, but it is by far not the value that will ensure that you have adequate funds to cover risks. Actually, depending on the values, in almost 50% of the cases the eventual cost of risks is going to be more than the EMV.
As a risk manager I am not willing to undertake a project with a 50% chance of failure. So why is EMV so popular?
Etienne Cornu
www.linkedin.com/in/etiennecornu
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Network:98540



You have a very valid point Etienne.

However, EVM accounts not only for the dollar figure assigned to each outcome but also for the likelihood of that outcome occurring.

Everything has Cons & Pros but EVM combined with expert opinion should enhance your risk taking percentage.
Network:4504



It shows average outcome of all uncertain events, enables to select the best decision, and in calculating contingency reserve.
Network:104436



Seem we have a different experience.
The risk reserve should be base on the quantitative value of your risk, Monte-Carlo.

Each risk is evaluated potential cost (time) and probability. Time should be convert in amount. For there you can make a simulation. From the resulting S-Curve an amount will be agree on my experience is that we select the amount that cover about 80%.

That mean your project is cover for 80% of risk, or you can read it has having 80% chance of success.

It all depend on you risk appetite!
Network:1638



Sorry Etiene because perhaps I did not understand your point. EVM is not about the 50% or probability. I fully agree with you that 50% of probability is the worst position to be. @Rami and @Vincent has put practice on the field. And what @Anupam has stated is the basement of the theory. In my work practice as risk manager if somebody goes to me with 50% of probability of something I fully agree with you and I say she/he: we can review your calculations but please say me if you can need help because 50% of probability is unacceptable.
Network:924



Yes, if you accept 50% probability of success in your project then you are very courageous. In the case of the risk reserve, knowing that there is about a 50% chance that your reserve will not cover risks is very bad, since the rest of the project team counts on you to be ready in case risks materialize. But still, people use EMV. It may be because the impact values are usually highly overstated and so the resulting EMV calculations produce something that makes sense.
Network:247



I am sorry that I may not be in full understanding on the question and discussion above.

First, EVM is one of very powerful tools to be used for contingency planning and decision making but in my humble opinion, it might be used or not be used based on the nature of project and project situation.

Second, in my opinion, there is less relationship between probability of project success and EVM application.
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1 reply by Kevin Tukei
Aug 23, 2018 6:03 PM
Kevin Tukei
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Hi Sungjoon,

I think EMV is correlated to the success of the project. Deliverables with high probabilities of negative risk could definitely derail the success of a project.
Network:33



Dec 07, 2016 2:44 PM
Replying to Sungjoon Park
...
I am sorry that I may not be in full understanding on the question and discussion above.

First, EVM is one of very powerful tools to be used for contingency planning and decision making but in my humble opinion, it might be used or not be used based on the nature of project and project situation.

Second, in my opinion, there is less relationship between probability of project success and EVM application.
Hi Sungjoon,

I think EMV is correlated to the success of the project. Deliverables with high probabilities of negative risk could definitely derail the success of a project.

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