Assessing Risk Probabilities

Assessing Risk Probability : Alternative Approaches

Dr David A. Hillson PMP FAPM FIRM, Director, Risk Doctor & Partners, david@risk-doctor.com

Dr David T. Hulett, Principal, Hulett & Associates LLC, info@projectrisk.com

Introduction

Effective risk management requires assessment of inherently uncertain events and circumstances, typically addressing two dimensions: how likely the uncertainty is to occur (probability), and what the effect would be if it happened (impact). While unambiguous frameworks can be developed for impact assessment, probability assessment is often less clear. This is particularly true for projects where data on risk probability from previous projects is either not available or not relevant. The credibility and value of the risk process is enhanced if data are collected with care, taking the time and using the tools that are needed properly to develop information based on judgemental inputs. Conversely, the process is undermined when probability assessment appears to be wholly subjective (a guess). It is therefore important to be able to assess probability with some degree of confidence. This paper presents a range of alternative techniques for assessing risk probability in an attempt to remove the subjectivity from this vital element of the risk management process.

Two-dimensional risk

There is broad consensus over the definition of “risk” among leading national and international standards and guidelines, as well as professional bodies (for example Simon et al. 1997; Australian/New Zealand Standard AS/NZS4360 1999; Project Management Institute 2000; British Standards Institute 2000; Institution of Civil Engineers 2002; UK Office of Government Commerce 2002; Institute of Risk Management 2002). Although the precise wording of different definitions may vary, all agree that risk has two dimensions. The first relates to uncertainty, since a risk is something which has not yet happened and which may or may not occur. The second is about...