Assessing Risk Probability

Yesterday I blogged about the concept of downside risk as a decision-making tool. Downside risk focuses on a worst case scenario as part of making a go/no-go decision. But it shouldn't be used exclusively or in isolation. Whenever we face a future event, we also have to consider the idea of probability. How likely is it that you'll trash a $50,000 piece of equipment? 1 in 10 million? or 1 in 10? Certainly makes a difference in your thinking. And in how much time needs to be spent on your decision.

For many issues you can probably get by with a good guess on probability based on your experience. For other issues there may be a historical fact base to reference. In extreme cases such as where substantial rewards are threatened by significant risks, you may want to get into more sophisticated mathematical modeling techniques. In any case, remember that future risk (and rewards) are also linked to probability.

For example: I recently returned from a cruise vacation that included a stop in Costa Rica. I've heard that the tree top zip line was a great adventure and was thinking of trying it. Other family members did it and raved about it. You ride as high as 200 feet above ground harnessed to a gravity driven free wheeling small trolley following a wire cable without any controls other than a leather glove that serves as a brake that might reduce your speed a little.

The risk: The cable, trolley or harness fail and you fall. In that case, given the height of much of the ride, you have a real possibility of severe injury or death. The reward: Great ride described as an adrenaline rush, great scenery and bragging rights to your friends, plus a chance for me to help overcome my fear of heights. The probability of equipment failure, serious injury or any injury for that matter -- remote.

Yes, I did it. Click here to see pictures.

But I did get a pretty good shock. I'll tell you about it tomorrow.

Copyright © 2009 Daniel W. Pelley
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