Diversification of infrastructure projects for emergent and unknown non‐systematic risks

Abstract

Allocating resources to competing large-scale infrastructure projects involves multiple objectives. Traditional decision-aiding methodologies focus on the tradeoffs among performance and resource objectives. Existing methodologies may fail to account for unknown and emergent risks that are typical of large-scale infrastructure investment allocation problems. In modern portfolio theory, it is well known that a diversified portfolio can be very effective to reduce nonsystematic risks. The approach of diversification is equally important in choosing robust portfolios of infrastructure projects that may be subject to emergent and unknown risks. In this paper, we demonstrate a methodology to analyze and compare the diversification of portfolios of large-scale infrastructure projects. We classify and explore several metrics of diversification and integrate them with risk and other performance objectives in a multiobjective approach. We test the new metrics and the methodology in a case study of hundreds of millions of dollars of infrastructure investments. The results suggest that the solutions that consider diversification are more robust to emergent risks, thus, identifying an opportunity to incorporate diversification-based optimization methodologies to support a variety of problems involving large-scale infrastructure investments.

Quantitative analysis of policies for governance of emergent dynamics in complex construction projects

“…The actual impact of these emergent dynamics on the responses of projects is significant and can result in poor performance of the infrastructure projects, i.e., the performance paradox. Several megaprojects and infrastructure projects in the global arena have been stalled due to emergent dynamics despite elaborate risk analysis and cost assessment (Flyvbjerg et al, 2003;Joshi and Lambert, 2011). The extensive list of impacted projects includes water treatment facilities, hydroelectric dams, wind farms, pipeline projects, or even transportation facilities (Flybjerg et al, 2003).…”

“…That is, rather than reflecting the actual emergent dynamics, the assessments reflect the desired consequences of decisions to prescribe optimal actions based on the norms (Han and Diekmann, 2001). Pricing the risk in bids is rather difficult using common risk analysis models (Laryea and Hughes, 2008), and these models may fail to account for the complexity of projects and the associated emergent risks (Joshi and Lambert, 2011;Fang and Marle, 2013). Risk analysis in strategic management should reflect the characteristics of the context and the stakeholders involved (Bromiley et al, 2001).…”

Identification of Protective Actions to Reduce the Vulnerability of Safety‐Critical Systems to Malevolent Intentional Acts: An Optimization‐Based Decision‐Making Approach

“…On the other hand, in modern portfolio theory, it is well known that a diversified portfolio can be very effective to reduce nonsystematic risks. The approach of diversification is equally important in choosing robust portfolios of infrastructure projects that may be subject to emergent and unknown risks (Joshi & Lambert, 2011;Thorisson, Lambert, Cardenas, & Linkov, 2017). The proposed methodology is expected to contribute also in this direction of optimal classification of options/investments and combinations of the same.…”

Credit risk control and management using limited diversification

“…The goal of distributing available resources into multi-projects is to diversify and reduce systematic and non-systematic risks. Diversification is a viable strategy to balance risk and reward and enhance the efficiency of resource allocation when investing candidates with homogeneous risks (Joshi and Lambert 2011). A company may incorporate with multi-partners when it is expanding the scope of its business activities into areas where it has little experience to reduce the uncertainty from asymmetric information.…”