Another overlooked risk assessment problem

Following up on last week’s post, there is one major problem that I haven’t talked about before.

Too many want to quantify every risk in dollars (or other currency) as if they were equal. But they are not.

Maybe they avoid the trap of multiplying one possible impact by its likelihood. (That is wrong for several reasons, discussed elsewhere.)

But they still come up with some number of dollars for the level of risk that is not comparable to other sources of risk and cannot be aggregated with other risks and opportunities to develop the big picture necessary for decision-making.

The easiest situation to illustrate this is:

• Risk A: The risk that one or more major customers will not issue orders at the anticipated level is assessed with a number based on the potential revenue
• Risk B: The risk that gas prices will risk and increase the cost of both purchased materials and related freight; this is assessed with a number based on the potential change in cost.

These are not the same dollars.

How about this one?

• Risk C: The risk that a lawsuit will result in a verdict against the company, causing the company to have to make a massive payment (even if the lawsuit is settled). This time, the dollars…