Analyzing the Balance of Qualitative and Quantitative Risk Assessment

This report examines the crucial role of risk assessment in business and investment decisions. It delves into both qualitative and quantitative methods, highlighting their respective strengths and limitations. The report discusses the quantitative approach, including techniques like annualized loss expectancy (ALE), single loss expectancy (SLE), and annual rate of occurrence (ARO), along with tools such as simulation, decision trees, sensitivity analysis, and expectancy value (EMV). Conversely, the report explores qualitative methods, such as brainstorming, interviews, and expert elicitation. It emphasizes the importance of balancing these approaches, acknowledging the limitations of qualitative analysis, particularly in providing a comprehensive measure of risk, and the need for quantitative analysis to address measurable projects and uncertainty. The report concludes by advocating for the integration of both qualitative and quantitative methods to achieve a more thorough and insightful risk assessment.

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Entrepreneurs and managers often determine the likelihood of loss of a particular investment
before putting their funds in it. Risk assessment helps to determine if an investment is profitable, the steps
that can be taken to mitigate the potential hazards and analyze what could happen if the hazard occurs.
Jorio (2000). This paper seeks to analyze the need to balance the qualitative and quantitative assessment
of risks.
Risk assessment determines the qualitative and quantitative estimate of the risk of a recognized
threat. Quantitative risk assessment requires calculation of both risk and the probability that the loss will
occur. According to Dey (2001) p 640, annualized loss expectancy (ALE) may be used to justify the cost
of implementing measures to protect assets. This may be calculated by multiplying the single loss
expectancy (SLE) which is the loss of value based on a single incidence of loss, with the annual rate of
occurrence (ARO) which is an estimate of how often the threat would be successful in causing
destruction.
The quantitative method analyzes the effect of the risky events and assigns a numerical rating to
the risks. It also allows decision makers to make decisions in the presence of uncertainty. This process
uses tools such as simulation, decision tree, sensitivity analysis, expectancy value (EMV) to analyze risk.
Sensitivity analysis assists to establish the risks that have the potential to impact and examines the
extent to which the uncertainty affects the objectives set to be achieved. On the other hand, the EVM
calculates the average outcomes when the future carries scenarios that may or may not happen. It is
calculated by multiplying the value of each possible outcome by its probability of occurrence then adding
them all together. De Hang and Ale (2005)
The decision tree is structured in a decision tree diagram which describes a situation under
consideration and the outcomes of each possible scenario as Sonnenreich and Stout (2006) p. 50 puts it. It
incorporates the cost of available choices, the probabilities, and the rewards.

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Consequently, qualitative assessments of risk tools have also been largely used alongside the
quantitative ones. This technique is simpler compared to quantitative. It involves prioritizing risks for
further actions by assessing and combining the probability of occurrence. Single risks are classified
manually and probabilities computed concerning the entire project. Given (2008)
The starting point for this risk analysis involves a risk narrative which describes an identified
risk. The qualitative tools that can be used to analyze risk include brainstorming, interviewing and expert
elicitation. Qualitative risk analysis must be performed before quantitative risk analysis. It’s the only way
that all kinds of risk can be integrated into one register.
Brainstorming is an approach for generating ideas from a group of participants. The process can
be either formal or informal. According to Wooldridge (2008), p20 facilitators prepare in advance, and
the output might be in a list of ideas that will be evaluated. Interviews, however, can be used when it’s
undesirable to bring people for brainstorming. They can be used to identify and assess the risk.
Expert elicitation is a technique for risk identification .it’s a process of formalizing and
quantifying in probability terms or expert judgment about uncertain events. The process integrates
empirical data with scientific judgment and comes up with possible likelihoods.
As noted above qualitative method enables the comparative rating of environmental, reputational,
health and safety and other impacts that cannot be reduced to financial impact. Furthermore, where the
risks cover difficult problems which aren't measurable, qualitative risk analysis offers the best of
management and development of solutions.
Expert judgment is to remain the cornerstone of any risk assessment though it should be
complemented by the quantitative methods because it’s unable to provide an overall measure of how risky
a project is. In addition, the qualitative analysis reveals its limitations when a greater level of definition is
required to make a decision. Qualitative methods are equally hampered by language barriers associated
with those involved in interpretation. Copper (2005)

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Due to these limitations, an organization should also use quantitative risk analysis discussed
above assessed by qualitative means. In addition, it can be used on any measurable project, and it allows
for evaluation of uncertainty ranges .this means that quantitative tools can deal with estimating
inaccuracies as well as uncertain events resulting in a more comprehensive model of assessing risk.
Although the qualitative risk analysis is widely used, whether enough data are provided, the risk
assessment can be performed through quantitative risk analysis. The application of qualitative tools
needed improvements particularly in reducing the subjective level and obtaining results with greater value
and impact. This has led to the adoption of quantitative analysis which allows further possibilities of
analysis.

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References
Cooper, D.F., 2005. Project risk management guidelines: Managing risk in large projects and
complex procurements. John Wiley & Sons, Inc.
De Haag, P.U. and Ale, B.J.M., 2005. Guidelines for Quantitative Risk Assessment: Purple
Book. Ministerie van Volkshuisvesting en Ruimtelijke Ordering (VROM).
Dey, P.K., 2001. Decision support system for risk management: a case study. Management
Decision, 39(8), pp.634-649.
Given, L.M. ed., 2008. The Sage encyclopedia of qualitative research methods. Sage
Publications.
Jorion, P., 2000. Value at risk.
Sonnenreich, W., Albanese, J. and Stout, B., 2006. Return on security investment (ROSI)-a
practical quantitative model. Journal of Research and practice in Information Technology, 38(1),
pp.45-56.
Wooldridge, M., 2008. Qualitative risk assessment. In Microbial Risk Analysis of Foods (pp. 1-
28). American Society of Microbiology.