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Risk Matrix: Definition & Examples

Instructor: Brianna Whiting
Life is full of risks. There are risks every time we get in our car and every time we let our child walk across the street. Risks are everywhere and businesses are not excluded. In this lesson we will learn how many businesses handle risks.

Looking at Risk

Have you ever gone on some sort of adventure? Maybe you went zip lining or jumped out of an airplane. Whatever exciting thrill you chose, did you think about the risks first? What were the chances that you would be hurt or worse? While adventures do carry risks, they are not the only place we weigh potential outcomes. You see, we think about risk in many aspects in our lives including where business is concerned. Because risk can be detrimental to a company, being able to identify the risk and determine how severe it can be, is an essential part of being a successful business. In this lesson we will learn about a risk matrix which is a graphical depiction of the severity and likelihood of an event that is not wanted.

Risk Matrix Basics

Let's start with going over the basics of a risk matrix. Companies want to be prepared for an event that might hurt their business. These unwanted events are known as risks. Using a risk matrix, a company can not only identify the size of the risk, but it can help explain whether or not the risk can be controlled. When creating a risk matrix there are two major categories, which can also be termed dimensions. Those dimensions are the severity and the likelihood of the risk. When a company determines where the risk falls within each category, they are able to place it on the matrix.

The matrix forms a box where the severity of the risk lines the left side and the probability of the risk lines the bottom of the box. When you line the two up you will be able to determine where the risk lies on the matrix.

Probability

There are a five categories that the probability of a risk can fall within. These categories are as follows:

1.Unlikely- If a risk is not likely to happen and is considered to be rare, it would be placed in the unlikely category. The probability of a risk in this category is less than 10%.

2. Seldom-A risk in this category is still very rare but more common than those in the unlikely category. These risks still need to be considered and cannot be ruled out yet.

3.Occasional-When a risk has a 50% chance or occurring or a 50% chance of not occurring, it is known as an occasional risk.

4. Likely-Any risk that is above 60% but below 80% is categorized as a likely risk.

5. Definite- Last, those risks that have an 80% or higher probability to be an unwanted event are termed definite. This means they are more likely than not to occur and interfere.

Severity

The other side of the matrix is severity. This explains how bad the risk effects the business. When assessing the severity companies often refer to PEAR which represents people, environment, assets, and reputation. If for example, a person wrecks a big piece of machinery when moving pallets in a warehouse, people, assets, and reputation could be impacted. This is because the person driving or other employees could be hurt, the machine could be destroyed, and the reputation for safety could be jeopardized. The following six categories asses the severity of the risk.

1. Insignificant- Risks that have minimal effects are insignificant.

2. Marginal- Small effects on the progress of a project with little damage are classified as marginal. They are small in nature but larger than those that are insignificant.

3. Moderate-When a risk can cause noticeable damage but is not that likely to occur, it is considered a moderate risk.

4. Critical-Large risks that can cause large losses and large consequences are known as critical risks.

5. Catastrophic-The worst threat of all is known as a catastrophic risk. They can cause extreme damage to a project.

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