Estimation of Downside Risks in Project Portfolio Selection

The Department of Decision Sciences invites you to attend Estimation of Downside Risks in Project Portfolio Selection Speaker: Janne Kettunen, Assistant Professor, George Washington University

Abstract Project portfolio selection is an important decision in many organizations. Most studies on project portfolio selection focus on identifying the ‘right’ project portfolio under various criteria, such as reward and risk. We show that the uncertainties in estimating projects’ values, combined with the selection of a subset of projects, has major implications for the risk estimates about portfolio value. From our analytical and simulation results, we can conclude that if downside risks are measured in terms of lower percentiles of the distribution of portfolio value, the estimates will have a systematic upward or downward bias depending on correlations among project values and among estimation errors. Second, if the portfolio selection is curtailed by risk constraints, we demonstrate that tighter risk constraints results in more optimistic risk estimates. Third, even if employing Bayesian value estimates in many cases improves the accuracy of risk estimates, it will not yield unbiased estimates. To obtain unbiased risk estimates, we propose the calibration of the estimates, where the calibration amount can be derived by analyzing past selection processes or by simulating the portfolio selection process. Finally, we propose how the calibration of risk estimates can be employed in the project portfolio selection so that the portfolio more meticulously stays within the DM’s specified risk level being free of the systematic bias in the risk estimate.

Biography Janne Kettunen is an assistant professor of decision sciences at the George Washington University School of Business. He has previously been an assistant professor jointly at the askayne School of Business and at the Institute for Sustainable Energy Environment and Economy. He has also served in the advisory committee for Deputy Minister of Environment Canada Paul Boothe on “Government’s GHG emissions plans, how to move forward with a regulatory approach for all major emitters.” Kettunen received MS from the Helsinki University of Technology, MBA from the Hawaii Pacific University, and DSc from the Helsinki University of Technology. The last three years of his doctoral studies 2006-2009, he spent at the London Business School as a visiting PhD student and a research fellow. Prior to engaging in the academic career, he has worked with companies and institutes including Nokia (Japan), The Board of Actuarials Standards (U.K.), Compagnie Financiere Tradition (Asia Pacific), and Institute of Strategy and International Business (Finland).