Managing Risk – Part 1

This is the start of a 5 part series on managing risk. Risk management is second only to communications as a core skill for project managers and this week’s 5 part series offers a quick refresher on some of the important concepts.

What is Risk?

The pyramid below lists stages of understanding ranging from low (to bottom of the pyramid) to high (the top).

The first stage is pure uncertainty. I’ll use a coin flip to illustrate these different stages, you’re going to flip a coin but you’ve absolutely no idea of what the outcomes could possibly be. You’ve no ideas that heads is more likely than the coin disappearing in a puff of smoke.

The second step is to understand at least some (but not all) of the potential outcomes, for example if I flip a coin, it could be heads.

The third step is the complete set of outcomes. If I flip a coin it could be heads or tails and no other outcomes are possible.

The forth step is to know the probabilities associated with an outcome for example 50% heads and 50% tails.

The final step is to know the outcome. This doesn’t work so well with coin example because a coin flip is designed to maintain a balance of uncertainty between two outcomes, but if you were a physics genius and knew exactly how the coin would be flipped, how clean the coin was on each side, and the impact of wind direction, then you would know in advanced how the coin would land.

But, hang on, you ask, in this final example risk management isn’t needed?

Exactly, that’s the point. Risk management is a way of dealing with our imperfect understanding of the world and can be done away we get to a total understanding of the situation so as to predict the outcome. Just as a perfect driver wouldn’t need a seat belt. In most cases, though, we’re not this good and risk management is still needed.

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