Possibility. Probability and Effects

People often confuse possibility with probability. Though they are related, they are not the same. Probability is the likelihood of some event occurring.  Any event with a probability greater than zero is possible. If the probability of an event is one, then it is guaranteed to occur. Very few things in the world are impossible. They might be extremely unlikely to happen but not impossible.

In business, one must at least consider all possible outcomes. Yet people frequently analyze just the best and worst case scenarios and then conclude that the expected result is the average of these two outcomes. This implies that the probability of the outcomes is 0.5 for both the good and the bad outcome. It also ignores the reality that most of the time, outcomes fall somewhere in between the best and worst case scenarios.

Good planning neither ignores these outcomes nor does it treat all those outcomes as equally likely to occur. Instead, a competent manager should attempt to assign probabilities to the range of possible outcomes to attempt to analyze how these outcomes impact the organization. This requires an analysis of the probability of something occurring and an analysis of what happens if that occurs.

It is vital to ensure you are using probability to answer the appropriate question. Professor Sam Savage of Stanford University once wrote a brilliant illustration of this issue. He provides a hypothetical scenario where a drunk man randomly staggers across a busy two-lane highway (one lane of traffic in each direction) with a median in the middle. The drunk stumbles randomly to the right and to the left, spending about half the time on each side. If you were asked what his average position is, you'd be correct to say right in the middle of the road on the median. However, if you used that answer to conclude that he's alive, you'd likely be wrong.

In other posts, I will explain why I believe that a proper understanding of risk is crucial for success in both one's business and personal life as well as introducing what simple tools exist performing this analysis.