Risk Analysis
What is Risk Analysis?
Risk analysis is a process of identifying, evaluating, and planning for potential negative events or threats that could impact a business or organization. It assesses the likelihood of each event occurring and the potential severity of its consequences, with the goal of taking proactive measures to mitigate or avoid hazards.1 Essentially, it's about understanding and managing potential risks by analyzing their probability and possible impacts.
The Basic Idea
Consider a teenager and her elderly grandmother heading up to the mountain, debating whether they should take snowboarding lessons for the day. Snowboarding can be dangerous for anyone at any age, but for the teenager, her risks are comparatively low: she has great balance, and she’s equipped with wrist guards and a helmet. The rewards are also high: she’s always wanted to snowboard, and if she can get the hang of it, she’ll be able to join her friends next season. For the teen’s grandmother, though, the risks are much higher: the grandmother’s aging bones are more fragile, she could get frostbite more easily, and she’s in danger of dislocating a hip. She also isn’t too interested in snowboarding and would rather sit in the lodge and enjoy a nice hot cocoa. For the teen and her grandmother, their different risk versus reward calculations may lead to different outcomes, and rightfully so. It might be easy to guess what the grandmother and teen should each do in this situation based on their individual risk factors, but some situations are more nuanced.
While some risks are obviously much greater than others (like driving in a snowstorm or while under the influence of drugs or alcohol), there is no way to live completely risk-free; that’s the price of being mortal. Some risks are so high and their reward so low (like driving without a seatbelt) that there may be a clear consensus on whether the risk is worth taking. However, other situations may be more complicated, and whether or not a risk should be taken depends on the individual and their circumstances.
This is where a risk analysis can be incredibly helpful, as it offers a structured way of understanding and evaluating the potential for harm or adverse outcomes in a specific situation, as well as the likelihood of those outcomes occurring. It involves examining human behaviors, environmental factors, and decision-making processes that contribute to risks, as well as the consequences of those threats if they materialize. In practice, risk analysis involves identifying the risk, evaluating the likelihood and potential impacts, and then mitigating the risk by figuring out what can be done to reduce either the likelihood or the impact.1
“Risk is a function of how poorly a strategy will perform if the 'wrong' scenario occurs.”
— Michael E. Porter, Competitive Advantage: Creating and Sustaining Superior Performance (1985).
About the Author
Annika Steele
Annika completed her Masters at the London School of Economics in an interdisciplinary program combining behavioral science, behavioral economics, social psychology, and sustainability. Professionally, she’s applied data-driven insights in project management, consulting, data analytics, and policy proposal. Passionate about the power of psychology to influence an array of social systems, her research has looked at reproductive health, animal welfare, and perfectionism in female distance runners.
