MS&E 250A

Engineering Risk Analysis

Instructor: Professor Elisabeth Paté-Cornell

Huang Engineering Center, Room 336
Phone: (650) 725-1624
Office Hours: By appointment on Tuesdays, 2:00PM – 3:00PM (please email
Professor prior to attendance)
E-mail address: mep@stanford.edu

Location: Thornton 102 or SCPD

Lectures: Mondays and Wednesdays 1:30PM – 2:50PM

Problem Fridays 2:30PM – 3:20PM, at Thornton 102. Available through SCPD website.
Sessions: Problem sessions will begin on Friday, Jan. 19, 2018 and will be held
most subsequent Fridays.

Homework: Preliminary homework due Wednesday, January 17. The preliminary homework
does not count toward the final grade. There will be four graded homework
assignments throughout the course. Homework assignments are to be turned in to
the CAs at the beginning of the class on the day in which the assignment is due.

Exams: Midterm: Wednesday, February 7, 2018, 1:30pm – 2:50pm (in class)

Final: Wednesday, March 21, 2018, 3:30pm – 6:30pm Location TBD

Grading 45% Final Exam

Schema: 30% Midterm
25% Homework
+5% bonus Attendance and participation (SCPD students may participate via
the discussion forum on Piazza)

Books: No required textbook. (There is no single text that covers the course material.)
Class notes and readings are sufficient. Exercises will be presented in the problem
sessions.

Class Notes: Required. Class Notes available at the Stanford Bookstore. One copy is on reserve
at the Engineering Library. Additional readings will be posted on Piazza.

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Course Isaac Faber (ifaber@stanford.edu)
Assistants: Office Hours: Tuesdays 3:00pm – 4:00pm, Huang B008
Gregory Heon (gregheon@stanford.edu)
SCPD Office Hours: Thursdays 6:00pm – 7:00pm PST, Google Hangout
(https://hangouts.google.com/hangouts/_/qc5vgmc5wrgetjjkqd2gxuuonue)
(see Piazza for BlueJeans meeting details)
Richard Kim (richhkim@stanford.edu)
Office Hours: Mondays 10:00am – 11:00am, Huang B016
Travis Trammell (travist3@stanford.edu)
Office Hours: Thursdays 11:00am – 12:00pm, Huang 219

Websites: Enroll via http://canvas.stanford.edu (in addition to registering for the class on
Axess). The course website will include all handouts, announcements, and
clarifications to assignments.

Course discussion forum for students will be available at

https://piazza.com/stanford/winter2018/mse250a

Other: Please arrive to class on time. Do not use laptops during class, and do not use
mobile devices. Attendance is mandatory, and participation will count toward
your final grade through bonus points that can change your letter grade. For this
reason, access to SCPD videos will not be granted to students in residence.

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 Weekly Schedule
(order of topics subject to change)

PART 1: BASIC CONCEPTS

Week 1
Monday, Jan. 8 §1: Managing and Reducing Risks
§2: Risk Analysis Procedures and Examples
§3: Risk Characterization and Measures
Preliminary Homework Assigned
Wednesday, Jan. 10 §4: Treatment of Uncertainty in Risk Analysis
§5: Bayesian Probability and Updating
PART 2: RISK ANALYSIS AS DECISION SUPPORT
Week 2
Monday, Jan. 15 Martin Luther King Day (no class)
Wednesday, Jan. 17 §6: Example of Risk Analysis and Potential Pitfalls
§7: Bayesian Networks and Influence Diagrams
§8: Value of Information from Tests
Preliminary Homework Due
Homework #1 Assigned
Friday, Jan. 19 Problem Session 1: Risk Analysis Introduction
Week 3
Monday, Jan. 22 §9: Probabilistic Risk Analysis: The Basics
§10: Functional Block Diagrams; Event Trees
Homework #1 Due
Wednesday, Jan. 24 §11: Fault Trees
§12: Systems Evolution: Markov Model
Homework #2 Assigned
Friday, Jan. 26 Problem Session 2: Probabilistic Risk Analysis
PART 3: PROBABILISTIC RISK ANALYSIS AND SYSTEMS RELIABILITY
Week 4
Monday, Jan. 29 §13: Safety Optimization Under Economic Constraints
§14: Appendix 8: Expert Judgment

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 APRAM Model (Appendix 9)
Wednesday, Jan. 31 §15: Risk Perception and Risk Acceptance
§16: Valuation of Human Safety in Government & Industry
Decisions
Homework #2 Due
Friday, Feb. 2 Problem Session 3: Markov Models and Midterm Review
Week 5
Monday, Feb. 5 §17: Future Risks: The Social Rate of Discount
§18: Human and Organizational Factors in Probabilistic Risk
Analysis: The SAM Model
Wednesday, Feb. 7 In-Class Midterm
Friday, Feb. 9 No Problem Session
Week 6
Monday, Feb. 12 §19: Warning Systems in Risk Management
Oil Rig Accidents: Piper Alpha and British Petroleum
Wednesday, Feb. 14 §20: Global Risk Management: Insuring and Improving the System
§21: A Dynamic Risk Analysis: Reduction of Fire Risks in Oil
Refineries
Homework #3 Assigned
Friday, Feb. 16 Problem Session 4: Optimization, Loads and Capacities
PART 4: ECONOMICS AND MANAGEMENT OF ENGINEERING RISKS
Week 7
Monday, Feb. 19 President’s Day (no class)
Wednesday, Feb. 21 Guest Speaker on Failure Analysis, Dr. Roger McCarthy
Homework #3 Due
Friday, Feb. 23 Problem Session 5: SAM Model
Week 8
Monday, Feb. 26 Guest Speaker on Seismic Risks, Professor Jack Baker
Wednesday, Feb. 28 §22: Nuclear Power Plants & Fukushima
Homework #4 Assigned
Friday, Mar. 2 Problem Session 6: Warning Systems

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PART 5: CASE STUDIES
Week 9
Monday, Mar. 5 §23: Risk Analysis for the Black Tiles of NASA Space Shuttle
Wednesday, Mar. 7 §24: Anesthesia Patient Risk Analysis Study
Homework #4 Due
Friday, Mar. 9 No Problem Session
Week 10
Monday, Mar. 12 Guest Speaker on Risk Management Under Time Pressure, ADM
(ret.) Jim Ellis
Wednesday, Mar. 14 §25: Concluding Remarks
Friday, Mar. 16 Problem Session 7: Final Review
Final Exam
Wednesday, March 21, 2018, 3:30PM – 6:30PM Location TBD

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 Additional Information

Students who enroll in this class will be responsible for understanding the answers to the
following frequently-asked questions and observing the stated policies, so please read this
document carefully. The teaching team welcomes your additional questions.

1. What can I expect to learn in this course? What will I need to do to succeed?
The objective of this course is to present methods and examples of engineering risk
analysis, mostly in the engineering domain, and to present and discuss the conceptual
framework for using these methods in public and private sector decisions. We will not
focus specifically on financial risk. If you are interested in financial risk analysis, please
see MS&E 246: Financial Risk Management with Professor Kay Giesecke.

The scope and concepts of the course have applications in most domains of engineering –
mechanical, electrical, aeronautic, civil, etc. – which involve decision making under
uncertainty. We will also discuss personal decisions you might make and a medical case
(anesthesia). Emphasis will be placed on risk to human safety from the failure of critical
engineered facilities and equipment, and on the philosophical and political issues
involved in the risk-benefit trade-offs.

To understand the methods and examples presented, you will need to use the offered
resources (formal class meetings, office hours, course web pages and forum, other on-line
resources, problem sets and solutions, and each other!) to grasp and reinforce this
material. Specifically, your success will depend on:

• Attending and participating in class and review sessions

• Completing reading assignments prior to class discussion
• Completing and turning in homework assignments when they are due
• Doing well on the midterm and final exams
• Sharing your questions and insights with one another and the teaching team

2. Who should take this class?

This course is designed for graduate students. Seniors are welcome provided they satisfy
the prerequisites and they are aware of some potential difficulties, for example, the
discussion of open-ended questions.

3. Are there any prerequisites for this class?

There are three prerequisites and all are important: Engineering Economy (cash flow
analysis and discounting); Statistics and Probability, particularly Bayesian Probability
(at Stanford Stat 116 or MS&E 120/220); and Decision Analysis either in the form of
MS&E 152 or MS&E 252 or an equivalent course. Additionally, students should be
familiar with the basics of Markov Processes and with Convex Optimization. While

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 risk analysis applications of Markov processes and optimization will be taught, it will be
assumed that students have seen these methods before.

4. I want to establish a relationship with Professor Paté-Cornell and the teaching team.
We’re looking forward to getting to know you, too! We want to learn your name as soon
as possible, and for this purpose, we ask that you to introduce yourself when you speak in
class and to sit in the same place for each class. Part of the course is a dialog about risk-
related issues; your active participation will help us get to know you. You may also
participate via the Piazza discussion forum, but for in-residence students this does not
substitute for regular attendance.

5. Do I need to attend every class?

Yes, attendance in mandatory, unless you need medical attention and must stay at
home. In all other cases, we expect you to attend all classes. We are covering a large
amount of material in this course and you are responsible for all the material covered in
class discussions. If you must miss one class, please let us know in advance. If you think
that it will be necessary for you to miss more than a couple of classes, we recommend
that you register for another course. We will do our best to start and end each class on
time and ask you to do the same. In-residence students will not be granted access to
SCPD-recorded lectures except as required by the Stanford Office of Accessible
Education / Disability Resource Center.

6. When are homework assignments due? Can I turn in my homework late? How will
homeworks be graded? What resources may I use without violating the Stanford Honor
Code?
Homework must be handed in class on the due date shown in the course calendar.
Homework submitted after solutions are posted on the website will not be accepted.
Complete solutions to all problems will be posted on Canvas.

You may discuss the homework problems with classmates. However, you must solve the
problems and write up your own answers. Use of other people’s work when not allowed,
or failing to cite your sources, is an act of plagiarism and a violation of the Stanford
Honor Code. It robs you of the opportunity to practice and learn on carefully crafted
problems, and does not help you prepare for exams.

7. What should I do if I have a medical condition?

Stanford’s policy is that all accommodations for disabilities (both temporary and
permanent) be coordinated through the Office of Accessible Education / Disability
Resource Center. Their website is https://oae.stanford.edu/. Please speak to them, and
provide us with whatever documentation they prepare for you. We will not ask questions
regarding your disability. Please do not ask us for accommodations for a medical
condition without having first spoken to the OAE/DRC. We are not medical
professionals, and we have no basis on which to evaluate your request.

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8. I have a schedule conflict. May I write the midterm (or final) at a different time or
location?
All students are required to take the exams on the designated date, time, and
location. (SCPD students have specially designated exam locations.) There is no
alternative final exam. The date and time for the final, Wednesday, March 21, 2018 have
been scheduled by the university, and we have no ability to change it. If you have an
emergency and are unable to attend an exam, please talk to one of the CAs immediately,
and we will try to work with you. Under no circumstances do travel plans for spring
break constitute an emergency. Do not make travel plans for before the final.

9. What if I have a question that was not answered in the class or review session? What if I
have a question of a personal nature?
We want to hear your questions in class. However, if later you have general-interest
questions about course material or administration, they should be posed through the
discussion forum on Piazza. (If you are wondering about something, chances are good
that other students are too.) Students can submit questions to the forum at any time and
are welcome to contribute answers as well. Therefore, email to the course assistants
should be limited to personal matters related to the course. The course assistants will
typically provide feedback within one working day.

The teaching team will be glad to discuss the course or issues of interest to you on an
individual basis. Please come see us during office hours, contact us via email, or make an
appointment to see Professor Paté-Cornell through her assistant Lissa Zelaya if you
cannot make her office hours.

10. What opportunities are there to continue my studies in engineering risk analysis?
MS&E 250B is a project course based on MS&E 250A that will take place in the
Spring quarter. Students work in groups of 4. Several topics and “clients” will be
suggested by the teaching team (examples of past projects: risk analysis for the design of
a communication satellite, risk analysis for the maintenance of the Boeing 737 between
flights, risk analysis for medical procedures at Stanford Hospital, risk analysis and
decision support for a global automobile manufacturer). If you have a special interest,
you may also define a suitable risk analysis project and propose it to us.

11. What materials or assistance are permitted during the midterm and final exams without
violating the Stanford Honor Code?
All exams must represent your individual work. You may use a standard calculator and a
dictionary, and you may ask clarifying questions of the teaching team members. No other
discussion, reference material or aids of any kind are allowed during the exams. Please
respect your fellow students and avoid scoring penalties by turning in your completed
exams immediately after time is called.

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12. My homework (or exam) was not graded correctly. How do I appeal the score?
Within seven days of a graded exam or homework’s return, a student may resubmit to the
course assistants a document that they feel has been scored inaccurately. A brief
statement explaining the student’s position should accompany the submission as a
separate document marked “Appeal Request”. Altering an original submission prior to
resubmission is a violation of the Stanford Honor Code. The teaching team will carefully
review and completely re-grade each resubmitted document.

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 Preliminary Homework
Due Wednesday, January 17, 2018

Problem #1
Consider a cash flow stream representing some investment, for example an infrastructure project
that is expected to generate revenue. Given the following time stream of cash flows (in thousands
of dollars) and a 15% annual discount rate:
120

90

70

50
50

30 30 30
X

0 1 2 3 4 5 6 7 8 9 10 years

-30
-50

a) Find the net present value (NPV) in year 0 dollars of the cash flows for years five through ten,
year 5 included.
b) Find the NPV at year zero of all cash flows as a function of the unknown cash flow X in year
four.
c) Assume that the cash flow X in year four is $20K. The project manager has an alternative
investment, which is an annuity consisting of uniform cash inflow of Y thousand dollars per
year starting in year 1 and ending in year 10. Note that if the manager chooses the annuity, no
cash flow will be received at year 0. What value of Y would make him indifferent between
the proposed project and the annuity?

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Problem #2
A discrete-time Markov process has 3 states, which are numbered 1, 2 and 3. The transition
probabilities are denoted 𝑝𝑛𝑚 and represent the probability that the process transitions from state
𝑛 to state 𝑚 in any one period. Assume that the process with the following transition
probabilities:

𝑝11 = 0.27
𝑝12 = 0.23
𝑝13 = 0.50
𝑝21 = 0.80
𝑝22 = 0.13
𝑝23 = 0.07
𝑝31 = 0.13
𝑝32 = 0.20
𝑝33 = 0.67

a) Draw a state diagram representing this process.

b) If the process begins in state 2 with certainty, what is the probability that it is in state 1 after
3 periods? (You may perform the computation with the aid of a graphing calculator or
computer software, but please ensure you understand the computation method.)
c) Write the global balance conditions, and use them to find the steady state probabilities.
d) If the transition probabilities were changed to 𝑝31 = 𝑝32 = 0, 𝑝33 = 1, how would this
change the steady state solution? Explain.

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Problem #3
a) Suppose that X and Y are jointly discrete random variables with probability mass function
𝑥𝑦
, for 𝑥 = 1,2 and 𝑦 = 2,3,4
𝑝(𝑥, 𝑦) = {27
0, otherwise

Find 𝑝𝑥 (𝑥) and 𝑝𝑦 (𝑦). Are the random variables 𝑋 and 𝑌 independent?

b) Let the following density functions be given:

4 2
𝑓𝑋 (𝑥) = {3 − 𝑥 , 0 ≤ 𝑥 ≤ 1
0, otherwise

(Probability density function)

1
𝑓𝑌|𝑋 (𝑦|𝑥) = {2𝑥 2 , 0 ≤ 𝑦 ≤ 2𝑥 2
0, otherwise

(Conditional density function)

Find 𝑓𝑌 (𝑦) and 𝑓𝑋|𝑌 (𝑥|𝑦).

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Problem #4
Your company uses 90,000 units of a certain type of memory chip each year. Companies L, M,
and N each supply you with 30,000 chips per year. You test each chip upon arrival, and have
found the probabilities that a chip will fail are 1.5 × 10−3 , 1.5 × 10−4 , and 1.2 × 10−2 for each
company's product, respectively.

a) What is the probability that a given chip will fail if you don't know from which vendor it
came?
b) Given that a chip has failed, what is the probability that it came from Company L?
c) If you have two chips, and know from which vendor each came, are the failures of the chips
independent events?
d) If you have two chips and know that they came from the same vendor but don't know which
one, are the failures independent?

NOTE: Do not “guess.” Your answer must be based on probability computation whenever
necessary. State any assumptions you made in arriving at your answer.

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Problem #5
South Bay Air (SBA), a startup passenger airline, has an aircraft fleet that provides a capacity of
carrying 15,000 passengers per year. In making a three-year forecast, the marketing manager
estimated that yearly demand will be as follows:

Passenger/Year Probability Revenue/Year

Low 15,000 0.4 $250K
Medium 20,000 0.5 $330K
High 32,000 0.1 $500K

As VP-Operations, you are convinced that SBA is a highly efficient airline and that capacity can
only be increased by acquiring new aircraft. You must make a presentation of a three-year plan
(from 2011 through 2013) to the Board of Directors. Which of the following capacity options
will you recommend?

(a) Do nothing.
(b) Lease exactly one airplane from East Bay Air, available as soon as you pay the lease. Lease
fee for two years is $100K (you can only lease the plane for two years) and a lease can be
entered only January 1, 2011 or January 1, 2012. This provides additional capacity for 5,000
passengers per year. You must decide now (i.e., before seeing the 2011 demand) if you will
lease a plane.
(c) Buy a new airplane, available immediately (i.e. 1/1/11. A plane cannot be bought after this
date). Cost is $200K, payable on April 1, 2011. This provides additional capacity of 17,000
passengers per year.

This forecast is for three years only. At the end of this time, the state of California will revoke
your license and nationalize your equipment (i.e. no salvage value). Passenger demand will be
the same for the first two years (e.g., if it is medium in 2011, it will be medium in 2012), but it
may change again in 2013, independently of previous years.

Assume: The discount rate is 10% compounded monthly. The 10% is the nominal yearly
rate, not the effective yearly rate.
All calculations are in dollars of 1/1/2010.
Ignore operating costs.
Revenues occur at end of year.
Future revenues and costs have not been discounted.
SBA is an expected value decision maker.

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Problem #6
Describe an example of a risk analysis problem from a commercial, financial, technological, or
medical field. What are some of the uncertainties that need to be modeled? What is the risk of
concern? What might the policy or decision ramifications be for an analysis?

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