Monday, September 25, 2006

Equation for Risk

My friend Ken sort of brought this equation to my attention:

Risk = Consequence x Probability

This is a pretty intelligent equation. The 'Consequence' is how bad of an impact there is if something happens. "Probability" is how likely that something is to occur.

So, this has interesting implications. Technically the following:
a) The consequences of the thing happening are major, but the event is unlikely to happen, or
b) The consequences of the thing happening are minor, but the probability of it happening is extremely likely

Are technically worse than:
c) the consequences of the thing happening are moderate & the probability is moderate

This is shown (as an example) with the following values:
Risk = Consequence x Probability
example a) Consequence of 10, probability of 0.1 (10%); Risk = 10 * 0.1 = 1
example b) Consequence of 1, probability of 1 (100%); Risk = 1 * 1 = 1
example c) Consequence of 5, probability of 0.5 (50%); Risk = 5 * 0.5 = 2.5

So this factors into life decisions. For example, you could do something with huge consequences if you just minimize the likely hood of those consequences happening. Or you can do something that is guaranteed to happen, but minimize your consequences & you'll be fine....

Anyhow, just interesting.

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