Probability, risk and expected impact
Combine likelihood and consequence when comparing uncertain outcomes.
What you will learn
- Distinguish probability from impact.
- Calculate simple expected values.
- Recognise when averages conceal unacceptable risk.
Risk decisions require both likelihood and consequence. Expected value can organise comparisons, but ethical duties, extreme outcomes and unequal impacts may still matter even when the average appears favourable.
Core method
Risk decisions require both likelihood and consequence. Expected value can organise comparisons, but ethical duties, extreme outcomes and unequal impacts may still matter even when the average appears favourable.
- Define the exact decision or claim before analysing detail.
- Use evidence that is relevant to the stated context.
- Record uncertainty instead of replacing it with confident wording.
Applied case
Option A has a 10% chance of a $10,000 loss; option B has a 2% chance of a $40,000 loss. Their expected losses are $1,000 and $800, but option B has the more severe worst case.
Apply the method
Explain why choosing only the lower expected loss may be inadequate.
Review answer guidance
The organisation must also consider its capacity to absorb the $40,000 loss, who bears it, whether harm is reversible and whether safeguards can reduce the tail risk.
Use in an assessment
Apply the method to the information provided in the task. A strong response makes its reasoning traceable and does not rely on specialist facts that are absent from the evidence.
- Read the requested outcome and constraints first.
- Eliminate responses that exceed the available evidence.
- Review whether the conclusion answers the precise question.