Two topics come up again and again on the PMI-RMP exam: calculating expected monetary value (EMV), and choosing the right risk response strategy. This guide explains both in plain English.
What is expected monetary value?
EMV puts a single money figure on an uncertain event by combining how likely it is with how much it would cost (or earn):
EMV = probability × impact
Threats have a negative impact, opportunities a positive one. Add the EMVs of several risks together to see the overall exposure.
Worked example
A construction project has identified two risks:
- Threat: a 35% chance that a supplier delay costs $64,000. EMV = 0.35 × −$64,000 = −$22,400.
- Opportunity: a 15% chance that a bulk discount saves $48,000. EMV = 0.15 × $48,000 = +$7,200.
Combined EMV = −22,400 + 7,200 = −$15,200. That figure can help set the size of a contingency reserve for these known risks.
EMV in decision trees
Decision trees use the same idea. For each option, multiply each possible outcome by its probability, add them up, and include the option's cost. Then compare the options: the one with the best EMV is usually the preferred choice — unless the organisation's risk appetite says a lower-risk option is worth more.
Responses to threats
| Strategy | What it means | Example |
|---|---|---|
| Escalate | The threat is outside the project's scope or the project manager's authority, so it goes to the right owner in the organisation | A change in company policy affects the project |
| Avoid | Remove the threat completely, e.g. by changing the plan | Drop an untested technology from scope |
| Transfer | Shift ownership and impact to a third party | Insurance, warranties, fixed-price contracts |
| Mitigate | Reduce the probability or impact | Extra testing, a prototype, a second supplier |
| Accept | Acknowledge it; actively (set aside a contingency reserve) or passively (no action beyond monitoring) | A small, unlikely risk |
Responses to opportunities
| Strategy | What it means | Example |
|---|---|---|
| Escalate | The opportunity is outside the project's authority, so it goes to the right owner | A benefit that would serve the whole organisation |
| Exploit | Make sure the opportunity definitely happens | Assign your best people to finish early |
| Share | Partner with a third party better able to capture it | A joint venture |
| Enhance | Increase its probability or impact | Add resources to raise the chance of an early finish |
| Accept | Take advantage if it happens, without actively pursuing it | A possible but minor saving |
Three terms to know
- Residual risk: the risk that remains after a response is carried out.
- Secondary risk: a new risk created by carrying out a response.
- Contingency vs management reserve: contingency reserve covers identified risks ("known unknowns"); management reserve covers unidentified ones ("unknown unknowns").
Practise free
Work through the free PMI-RMP chapters, then test yourself with the free PMI-RMP practice questions and the free 115-question PMI-RMP mock exam.