Mitigating risk

Everyday we go out there trying to generate more value for ourselves than we expend, we are taking risks.  Risk is defined as a situation involving exposure to danger [reference].  Furthermore, we can calculate the risk by assessing two factors:

  • Likeliness event will occur, 1-3 risk rating
  • Severity of event if it does occur, 1-3 risk rating

By rating each of these 1-3 and multiplying the two factors together, you are able to come up with a risk factor between 1-9.  The closer to 9, the more likely the event will happen and the more severe the event will be.  It might help if I provide a few examples:

  • Losing your job as high performer – (1) likeliness x (3) severity = 3 risk factor
    This means the event will most likely not happen, but if it does happen the result will severely impact you.
  • Being late to a show – (2) likeliness x (1) severity = 2 risk factor
    This means the event might happen and if it does happen the result will most likely not severely impact you.
  • Business failing in unfavorable conditions – (3) likeliness x (3) severity = 9 risk factor

These are general examples, so in real life things would not be this simple.  Using this risk factor tool can be helpful in helping you better understand risk.  It is important to identify the risk(s) first and then rate them using this method.  If you do not identify all risks, then you may not fully understand the entire situation.

Life is super risky and not always fair, so I try to understand the risks before I start a new project, embark on a new adventure, or just step outside to get my mail.  We need to keep thinking about risks, but not let them make us so fearful we do not allow ourselves to accept new opportunities.  I believe there is a fine line between understanding risks and just being afraid to do stuff.  What are your thoughts?

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