Improve your life – learn about risk assessment

This is a dull post even by my standards. A paragraph in a letter in today’s Times, “The failure to distinguish between “risk” and “hazard” is the reason why so many foolish decisions are made in the name of health and safety. The hazard is a circumstance with the potential to cause harm, the risk is the likelihood that this potential will be realised.” prompts me to write about Risk Assessment. It’s a subject so dull that until recently only people in insurance knew much about it. Insurance is a job for people who find accountancy too exciting. But it does make quite a lot of money.

Now Risk Assessment is helping much of industry and commerce to allocate resources sensibly. It’s slowly creeping into the public sector and helping there too, for example it’s being used to reduce the regulatory burden on businesses which are unlikely not to comply.

It can help you as well. At its heart it’s incredibly simple. For a particular topic you need to assess the impact and also the probability of that impact materialising. Then you can plot things on a matrix (or graph) and look for things with high impact and high probability and deal with those first either by reducing the impact or the probability. This can be incredibly powerful if you’re trying to determine which of many competing topics to give your attention to. It works even better at the corporate level.

For example, if you’re running a business you might determine that there’s a high risk of mistakes in your accounts but, providing the size of error is likely to be low, the impact is small. This might stop you falling into the trap of spending hours getting your accounts 100% accurate instead of getting busy finding new customers because you would have assessed the impact of that failure as high.

This gives a clue as to where any effort should be directed. It should be focussed on reducing the impact or the probability of those things which fall into the upper right triangle of the matrix.