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The value of project risk management

Managing project risk costs money. This paper considers the bottom-line justification for project risk management and the question of whether there is some optimal level of investment in this activity. Few guidelines exist as to how an appropriate balance between risks and rewards can be achieved. This paper develops a simple model based on utility theory which can be used to compare the benefits of risk-reduction with its costs. An expected utility measure is more appropriate than expected value because it reflects the risk attitude of the organisation involved. The relevance and application of the concepts of the value of information and the value of control are also examined in the context of project risk management.