Using Trends In Variance To Understand Trends in Risk
I always prefer leading indicators to lagging ones. When our CFO comes in at the end of April, for instance, and tells me how we performed through March I am always interested to know but…
I often say, “What do I do with this information–it is now ancient history.”
The paper “The Canary in the Mineshaft: Key Indicators for success in aerospace and defense programs” discusses trending based on leading indicators:
- Trend in estimated schedule to complete (ETC)… ranges in estimates of time to complete, then Monte Carlo analysis based on the uncertainty
- Trend in net present value (NPV)… Value provided by this program, again based on a range… This factors in the cost to complete, maintenance and ownership costs as well as revenues derived
Their point is if the trend in variance of range estimates of the above items is getting smaller, risk is being reduced and if the trend is getting larger risk is increasing.
They wisely use a definition of risk that equates it to uncertainty rather than discrete risks in this context.
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