20 November 2012

Risk = PxI is wrong

You're estimating a project.

Let’s say you have a risk element and the event has a 25% chance of happening. If it does, it will add $100,000 to the cost of a particular task. You’ll resist the temptation to just add $25,000 to the task cost, because that’s not what happens in the real world. It’s one project, not a million transactions, so the average is invalid. In each possible future, it’s $100,000 or nothing.

It’s possible that downstream events would be triggered by the $100,000 while $25,000 would fly under the radar. Also, looking at the range of possible project costs, the high numbers would be $75,000 low, and the low numbers would be $25,000 high.

So don’t use Probability x Impact. Ever.

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