An Industry Standard Risk Analysis Technique

Abstract

:This article presents the industry standard technique for risk analysis, namely a graph or a plot with frequency of occurrence on one axis and severity of the consequences on the other. It points out the following common errors in implementing this technique: failing to differentiate between types of risk, using estimated probability rather than frequency of occurrence, using ordinal instead of cardinal numbers, using different ranges for severity and frequency, using an inappropriate combining equation, using linear instead of logarithmic scales, explaining only intermediate risks, and confusing risk with uncertainty. Then this article points out ways to ameliorate these mistakes. It presents an algorithm for deriving severity scores. It discusses many factors that affect human perception of risk. Finally, it discusses the mitigation benefit versus cost tradeoff that is always made in risk management.

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