Created by Oxford Professor John Gittins
and Dr. Anne-Marie Oreskovich
Oxford Professor John Gittins and his last doctoral student, Dr. Anne-Marie Oreskovich, created the Gittins-Oreskovich (GO) Risk Measures to address a gap in currently available tools for measuring risk in pharmaceutial research. In three journal articles, as well as Dr. Oreskovich’s doctoral thesis, the GO measures are proffered as alternative risk measures to canonically used tools like Value-at-Risk (VaR), Variance of Net Present Value (VarNPV), and utility theory.
BRIEF INFORMATION ABOUT THE GO MEASURES
Why were they created?
To improve upon current techniques for evaluating financial risk in drug development.
How do they work?
The first improvement over currently used techniques is to consider the maximum indebtedness reached by the aggregate cash flow, rather than simply NPV, which is the aggregate cash flow at the end of the project. We call this maximum the cash flow exposure, CFE. It is the first of our proposed new measures of risk. The second improvement is to consider the expected value ECFE (or even the entire distribution) rather than simply a quantile. The third improvement is to add to the aggregate cash flow at each stage the expected value of future cash flows, and to consider the maximum indebtedness on this basis, taking into account future prospects. This defines PCFE, the prospective cash flow exposure, and EPCFE, its expectation. PCFE is the second of our proposed new measures of risk.
Both have probability distributions over possible future scenarios. The best single-valued measure of risk is in each case the expectation of maximum financial exposure, ECFE and EPCFE.
How are they used in practice?
They can be used as stand-alone risk measures, or as part of a software package we created, called OPRRA, which aids in resource allocation in pharmaceutical research and similar capital investment projects.
How can I learn more?