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A study of how risk management can be developed in large industrial R&D projects

Written by Hanna Bertilsson

Paper category

Master Thesis


Business Administration>Management




Thesis: Risk assessment and risk behavior A contract is an agreement between different parties, a customer and a contractor. The client expects the contractor to perform a specifically determined task that will lead to the expected result described in the contract. To make this possible, the two parties reached an agreement based on all the knowledge that both parties have today [23] [25]. It is important to remember that performance is to be performed in the future. Therefore, the result becomes a kind of uncertainty and risk, because no one knows what the future will look like and what the situation will be at the time [25]. Not all situations are exactly what you want, and no agreement can be reached in all situations. This means that it always has incomplete agreements, which contain gray areas that can be viewed in different ways. Therefore, it is important to know who will take the risk in a certain task, because when it has already happened, no one is interested in it [25]. The client’s goal is to reach an agreement and he can ensure a good result. Good results refer to the expected results described in the contract. Of course, this is also the goal of contractors who want the transaction to be as beneficial to them as possible. Therefore, for both parties to reach an agreement and finally sign the contract, this must be a compromise. An example of a theory that includes how to formulate this agreement is agency theory, which focuses on the sharing of risks between different parties [25]. Agency theory Since the 1960s, different economists have studied the risk sharing between groups and individuals (for example, Arrow 1971). Various previous studies in the field described issues related to risk sharing. According to Eisenhardt [23], this is defined as one introduced when different parties to the cooperation have different attitudes towards risk. The benefits of creating agreements and dividing risk sharing among related parties are easy to understand. It can change the different conditions between participants, thereby changing the risk sharing between different parties. Recently, these types of problems have attracted people's attention and have developed agency theory [25]. The idea of ​​this theory is an agreement that describes the relationship between the customer and the contractor. The contractor is responsible for the assigned work, and the contractor shall perform the assigned and desired work. Agency theory tries to solve two problems that may arise in agency relations. The first problem that the theory tries to solve is the problem that may occur when (1) the goal between the client and the contractor is in dispute and (2) it is difficult or costly for the client to verify what the contractor is actually doing. 2.1.3 Theories of the individual as a decision maker The following section contains theories in the literature related to the individual as a decision maker. The literature regards individual decision makers as an organization or a person, they have a single interest to promote their decision-making, so they can be regarded as individuals in different theories [16]. Two-stage model Real-life decisions are often made under more or less uncertain conditions. It does not always have information and the probability of a certain event, so Kahneman and Tversky developed a model called the two-stage model (TSM). The model is a combination of two different theories, the latter also by the same author. The theories they incorporate into TSM are S-support theory and cumulative prospect theory [28]. Supporting theories to distinguish between events and descriptions of events can also be seen as hypothetical descriptions of the two developers Kahneman and Tversky [20]. Humans often evaluate hypothetical probabilities rather than real events because they find it easier to rely on these rather than reality. Assumptions can be divided into two different perspectives, implicit or explicit. The perspective depends on the situation, but the explicit perspective is more reliable than the implicit perspective [27]. When humans evaluate an implicit hypothesis, they do not analyze it in detail, but look at each part of it and the impact of each part. Instead, they create a perception of the entire event, which means that the parts that stand out from the rest will be evaluated. This reduces the credibility of the result, because it represents only a small part of the complete event that should be evaluated. Compared with implicit assumptions, evaluating explicit assumptions makes the results more real and credible because it is based on real information, which makes it easier for humans to evaluate it in the correct way [20]. Prospect theory is a behavioral economics theory, which was also developed by Kahneman and Tversky. This theory describes how people choose between different probabilistic alternatives, which involve the decision maker's risk-taking of known outcome probabilities [27]. According to prospect theory, humans usually overestimate small probabilities. The process of human thinking and decision-making begins with editing problems. The decision maker then constructs the problem in a way that makes the following assessment easier to perform. For example, it is best to record preliminary results and compare them with selected references. The reference is usually a baseline, but it can also be an expectation or goal, depending on the specific and unique situation [18]. Read Less