International Roundup, Vol 18, No 2

Conducting project risk analysis, How to do it and how not to do it

Dr Kenneth K Humphreys

I want to tell you a few things about Michael Curran, the President of Decision Sciences Corporation, who was the real pioneer of what this paper is about, project risk analysis. In 1964 he was ensconced in a career at Monsanto Chemical Company reading the Harvard Business Review, Jan/Feb 1964 issue. He was reading an article by David B. Hertz, "Risk Analysis in Capital Investment".

This article has been so popular that it was republished in 1979 and has been reprinted many times since. Curran recognized that Hertz was talking about some particular technique most of us have some familiarity with. Although Hertz never used the term, he was talking about Monte Carlo Simulation and how it could be used to address key issues in the problem of capital planning.

Monte Carlo Simulation is a technique devised by two brilliant mathematicians, John von Neuman and Oscar Morgenstern, the co-developers of game theory. They developed this to answer a problem in particle physics in the Manhattan Project in the 40's.

Once von Neuman and Morgenstern developed game theory, it wasn't long before other scientists and engineers realized the power of Monte Carlo. But in the article Curran saw that for the first time someone was suggesting that we could use it in business practice. It made so much sense to him that in 1968 he formed a corporation to do this full time, Decision Sciences Corp. His firm has pioneered the field of project risk analysis in the United States.

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