| John Spacey, March 02, 2016 updated on January 13, 2023
A probability-impact is a basic risk measurement that can be used to estimate the costs of risks. It is expressed as follows:
Risk = Probability * ImpactThe resulting risk estimate represents a probable loss.
ExampleAn ice cream cone costs $5 and a toddler has a 10% chance of dropping it without help. Risk = (10/100) * $5 = $0.50
Probability Impact Matrix When risk measures are based on rough estimates, as is often the case with project risk estimates, it is common to represent probability-impact as a matrix of discrete combinations. For example:
|90%||Small Ice Cream MessCost of clean up = $0.10||$0.09|
|50%||Big Ice Cream MessCost of clean up = $0.50||$0.25|
|10%||Total Loss of Ice CreamCost of replacement = $5||$0.50|
Probability DistributionsThe relationship between probability and impact is better modeled with a probability distribution that provides all possible combinations of probability and impact. Sophisticated risk measurements, such as those used in to model investment risk, are typically based on probability distributions and other statistical techniques.Risk measures that rely on a single sample of probability-impact or several samples in a probability-impact matrix are less accurate than those that are properly modeled with a probability distribution. In the example above, there may be thousands of possibilities between a small mess and total loss of an ice cream cone that can be modeled with a smooth curve. Such a curve might have a long tail with remote probabilities such as an ice cream cone causing damage to your car upholstery. As such, the few samples represented in the probability-impact matrix are a rough estimate that wouldn't be used by a bank or insurance company to measure risk.
This is the complete list of articles we have written about project management.
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A guide to project risk.
A list of basic project management techniques.
A definition of workaround with examples.
A list of project branding techniques.
A definition of project stakeholder management with examples.
A definition of action plan with examples.
The primary types of cost overrun.
The definition of document control with examples.
A guide to project oversight.
A definition of design driven development with examples.
A list of common project risks.
A list of common project stakeholders.
A list of common business risks.
The difference between a risk and an issue.
The four things that can be done about risk.
The definition of secondary risk with examples.
A guide to creating a risk register with an example.
A definition of risk perception with examples.
The common types of implementation.
A reasonably complete guide to project risk management.
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