How to Determine the Probability of an Occurrence For the Risk You Face
November 17, 2017
Once you’ve identified a risk event, your task isn’t over. Risk management requires you not only to identify your risk but also to manage it. That means to spend money to avoid the risk event or enhance the risk event and also to spend money only where it is justified.
Knowing where to spend money avoiding, mitigating or otherwise requires you to determine the risk exposure of the event. Fortunately, risk exposure is simply the product of the probability or risk and the value of the event. Unfortunately that means you need to determine both the value associated with the event and the probability of the event. Both of which can be difficult to determine.
Determining the value of the event can be difficult and fraught with error. But ultimately, it is a matter of analysis. You review the effects and determine your best guess of the costs associated with overcoming those effects.
Determining the probability of an occurrence for the risk you face is a more complex task.
It is possible that you might have some records or information to help you determine the probability of occurrence. Possible but unlikely. Instead, typically you need to predict or estimate the risk. In this article, I’m going to explain one method of estimating probabilities.
Since this is an estimation method using little information, you should use as much mental power as possible. Involvement by a number of experts is highly suggested. In addition, you should get as much help from your stakeholders as is possible before beginning.
You begin this method by ranking the events. Simply put them in order based on what you feel is their probability from highest to lowest. This will help you assign the risk levels as you work on refining your estimations.
The next step is to determine the range of risk. Begin with the two outer risk events. That is the most likely and the least likely. The best way to do this is to start with qualitative probabilities. Is this very likely? Or is it not very likely? It it highly unlikely?
The next step is to do the same thing for the middle event. All you need is to assign a rough qualitative value. While you’re doing that, try to determine how the middle event fits between the two outer events. Is it more towards the upper event or is it more towards the lower probability event.
Now you’re going to need a piece of graph paper. Yes, I know no one uses paper anymore. But if you have to use a white board and draw a grid on it. It doesn’t matter if you draw the grid from lowest to highest or from 0 to 1. Each has its advantages and disadvantages. As you practice with this method, you’ll find the version that works the best for you. But having a reasonably even separation of grid lines is absolutely necessary. Next, label the ranks of the grid using the values you used in the second step.
Now that you’ve got your grid with the qualitative rankings, it’s time to place the risks. Begin by placing the most probable and least probable of your risk events. Try to be proportional. Then place the middle event. Take the upper half of the events and place the middle event for that half. Do the same thing for the lower half. Remember that just because you are using the middle event doesn’t mean that the probability for the event will be in the middle. Try to be reasonably accurate in placing your events. Take the lowest group and place the middle event. Then do the same thing for the next group. And so on. Continue this pattern until you have placed all the events.
Now you’re ready to add values to the probabilities. Take the most likely and the least likely events. Assign a probability to each. Try to be as reasonable as possible.
Finally, you are going to segment the grid evenly. Once you’ve marked the grid into segments, you can use the map to visually estimate the probability for each event.