Posted in Strategy/Vision

Risk and impact

What is it?
How can we measure it?
What is ideal?

Everyone takes risks, I don’t see exceptions. We sit on a chair and there is a chance it may break. We stand but the ground may collapse. Yet we still stand.

I see this concept as risk and impact. Risk is the chance that certain event may happen. Like there is 50% chance that a coin flip turns out to be heads. Impact is confused with risk by many people. Impact is the amount of damage when the risk happens.

Example 1:
Sitting on chair.
Risk: it’s not often you see chair break but you do see it. Let’s say 1 in 2000 times.
Impact: if the chair breaks then we fall and there may be pain for maybe 2 days for me. Remember the same fall could have more impact on people with brittle bones. Let’s quantify this using pain-2days.

Example 2:
Taking a flight.
Risk: we do hear around 20-50 flights crashing a year. So it’s like say 1 in 7000.
Impact: the flight crashes and person may die. Family suffers the loss. So pain of 3years maybe. Mind you people will adapt to new way of life. Initially the pain maybe every second but eventually the frequency decreases. So impact is 3×365=1095. So impact is 3 years times number of suffers.

So ideally a persons decision making is dependant on risk x impact. So let’s say if the risk is 1% and impact is just 2 days of pain. Many people will take it. If you say risk is now 50% people may not. If we put risk back to 1% and say impact is breaking a leg, most people will avoid it.

 

P.S. In PM world they classify risk into two parts impact & probability. I think I would have confused PMs when i called probability as “risk”. Sorry

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