How do you incorporate uncertainty and variability into your risk assessment methods?

1 Define your risk criteria

Before you start assessing your risks, you need to define your risk criteria, which are the standards and thresholds that you use to measure and compare the likelihood and impact of different events. Your risk criteria should be aligned with your objectives, values, and stakeholder expectations, and should reflect the level of uncertainty and variability that you are willing to accept or tolerate. For example, you might use a scale of 1 to 5 to rate the probability and severity of each risk, or you might use a more qualitative approach, such as low, medium, or high.

2 Identify your sources of uncertainty and variability

The next step is to identify the sources of uncertainty and variability that affect your risk assessment. These are factors that can cause your assumptions, estimates, or predictions to be inaccurate or incomplete, as well as influence the occurrence or consequences of your risks. For example, data quality and availability can be unreliable, limited, or biased, while human behavior and judgment can change how people perceive and respond to risk. Additionally, external factors such as market conditions, regulations, competitors, or natural disasters can affect your risks. It is also important to consider how your risks interact with each other and how they affect or trigger other risks or create opportunities.

3 Use appropriate methods and tools

Depending on the nature and complexity of your risks, and the level of uncertainty and variability that you face, you might need to use different methods and tools to assess them. Sensitivity analysis, for instance, involves changing variables in a risk assessment model to see how they affect outcomes, such as testing how revenue projection changes when sales volume, price or costs increase or decrease. Scenario analysis creates and compares different plausible scenarios that represent alternative futures or situations. Monte Carlo simulation uses random sampling and probability distributions to generate a range of possible outcomes and their likelihoods. Lastly, decision trees create a graphical representation of choices and their outcomes, assigning probabilities and values to each branch. All these methods can help you evaluate the expected value of different options or strategies for managing risks.

4 Review and update your risk assessment

Your risk assessment is not a one-time activity, but a continuous process that requires regular review and update. You need to monitor your risks and their sources of uncertainty and variability, and check if they are still valid, relevant, and accurate. You also need to evaluate your risk criteria and methods, and see if they are still appropriate and effective. You should update your risk assessment whenever there are significant changes in your objectives, assumptions, data, environment, or stakeholder expectations.

5 Communicate and document your risk assessment

The final step is to communicate and document your risk assessment to your stakeholders, such as your team, management, clients, or partners. You need to explain how you incorporated uncertainty and variability into your risk assessment methods, and what are the implications and recommendations for your contingency planning. You should also document your risk assessment process, methods, tools, data, assumptions, results, and actions, and store them in a secure and accessible location. This will help you to track your risk performance, learn from your experience, and improve your future risk assessments.

6 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?