Probability, risk and expected impact
Combine likelihood and consequence when comparing uncertain outcomes.
Covered in this guide
- Distinguish probability from impact.
- Calculate simple expected values.
- Recognise when averages conceal unacceptable risk.
Risk decisions require both likelihood and consequence. Expected value can organise comparisons, but ethical duties, extreme outcomes and unequal impacts may still matter even when the average appears favourable.
Separate chance from consequence
Risk decisions require both likelihood and consequence. Expected value can organise comparisons, but ethical duties, extreme outcomes and unequal impacts may still matter even when the average appears favourable.
A rare event treated as if it were typical
Option A has a 10% chance of a $10,000 loss; option B has a 2% chance of a $40,000 loss. Their expected losses are $1,000 and $800, but option B has the more severe worst case.
Try this
Explain why choosing only the lower expected loss may be inadequate.
Review answer guidance
The organisation must also consider its capacity to absorb the $40,000 loss, who bears it, whether harm is reversible and whether safeguards can reduce the tail risk.
Risk language in the task
Say how likely the event is and how bad it would be if it happened. A vivid story is not a probability.