VersiTrax Defining Risk, Uncertainty, and Probability in Risk Analysis

Defining Risk, Uncertainty, and Probability in Risk Analysis

Risk analysis may look like nothing more than cautious foresight at its best, or pessimistic gambling at its worst. But, it is a necessary part of almost every business operation that a company chooses to undertake.

Choosing a risk-analysis partner is one of the wisest moves that a business owner can make. But, miscommunication can often become a serious hindrance to the growth of such a relationship. This is because the risk analysis industry doesn’t always use terms the way most of the world does, and that leads to a lot of confusion.

The best example of such confusion is how we use the terms “risk”, “uncertainty”, and “probability”. Each term has a distinct definition that companies need to understand before everything else, in order to see where any risk analysis team is coming from.

Risk

The simplest definition for this term is the consideration of the consequences that a specific activity (such as the operation of a specific system) can cause with respect to things that human value. The outcomes that many would classify as a risk are results that are considered as negative or undesirable.

Common examples of risk include the number of fatalities in the period of a year for law enforcement or military personnel. Another example would be the probability of an object being exposed to a hazard that needs to be in close proximity to that object (i.e. chemical contamination in a water treatment center).

Uncertainty

This refers to an imperfect or incomplete knowledge regarding the subject under study. These are the blank spaces in the formula that will only come to light after the event occurred. In our experience, this is something most companies have trouble coming to grips with.

Risk analysis is about giving businesses a picture of pros and cons for every move they want to make. This picture gets blurrier the further they push the envelope. If there’s no data that can conclusively point to a given direction, then our job is to inform our partners of the uncertainty that goes with such a move.

To be clear, just because there is a level of uncertainty within an analysis report doesn’t mean that it’s a bad move. Uncertainty can pertain to positive outcomes, such as the level of gain for example. The actual statistic of such a metric might be less or greater than the initial estimate, but both scenarios still favor the business.

Probability

The operational partner of uncertainty, probability is a measure that represents the likelihood of a certain scenario through calculus.

The method of measuring the probability of any kind of outcome depends on the situation. When, for example, there’s a finite number of results – all of which have an equal likelihood of occurring – then the classical probability is the answer. There’s also frequentist probability and subjective probability.

It’s important to remember that probability isn’t exactly the same as “likelihood” or “chance”. But, that’s a story for a different day.

These are just three of the terms that risk analyzers use on a daily basis, and it’s easy to see why confusion can happen. If you want to harness the power of risk analysis without getting stuck in the glossary, don’t hesitate to contact our team immediately.

We’ll work closely with you so that you not only get a comprehensive analysis report, but one that you can easily follow as well.

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