What are risks and opportunities?

Also see Introduction to risk analysis, Risk management introduction

A risk is an event that may possibly occur, and if it did occur would have a negative impact on the goals of the organization. Thus a risk event is composed of three elements:

  • The scenario.

  • Its probability of occurrence.

  • The size of its impact if it did occur (either a fixed value or a distribution).

An opportunity is an event that may possibly occur, and if it did occur would have a positive impact on the goals of the organization. Thus an opportunity is composed of the same three elements as a risk.

The management of an opportunity is essentially the opposite of managing a risk, i.e. one attempts to maximize the probability of an opportunity occurring, and to position oneself to enjoy the greatest benefit should the event occur.

It is good practice to use probabilities for risks and opportunities that are less than 50%: for example, it is better to treat a risk with 80% probability of occurring and a cost of $100,000 as an addition of $100,000 to the baseline cost, and then model an opportunity of saving $100,000 with 20% probability.

 

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