An anonymous comment in the Vail (Colorado) Daily News about the dangers of overanalyzing a decision reminded me that, while the benefits of risk analysis have been much vaunted, the costs of decision evaluation have not been clearly defined. Sure, it’s pretty easy to come up with a figure for a DFSS training effort or a budget for an entire risk management department. But what about the statistical analysis process itself?
Well, there’s staff time or your own time (which is worth something), Monte Carlo software, some portion of your computing costs,data acquisition, and on and on. Many variables. But the kind of costs I’m thinking of are the kind you rack up while you’re analyzing, say, option valuation, and not doing something else. These are opportunity costs. They are what really limit how thoroughgoing your risk analysis becomes, which layer you drill down to–and they are very difficult to quantify.
How do you calculate whether the time you’re spending in risk assessment is cost-effective? It’s a problem of operations risk. So I suppose you could enumerate all the other activities that would consume the same amount of time and model their paybacks. But that would cost you more time in statistical analysis. . . . and you would be left in a positive feedback loop.
In the days ahead I’ll be talking to risk management and operations research folks to find out how they decide how much analysis is just the right amount–not too much, and not too little. I’ll be surprised if I turn up any computational approaches–but who knows?