With your help we now have an assessment we feel much more confident using for investment planning - we can show it's been validated against real experience.

measuring risk and uncertainty

Measuring risk and uncertainty differs in some important ways from measuring everyday objects.   When it comes to measuring 'height', for example, there is a widely shared understanding of

So, if a Director asked a staff member how high the front door was, it's very unlikely they would misunderstand or misinterpret the answer. But when we're dealing with risk and uncertainty it's quite a different matter. We have illustrated the problems that can crop up here with a few examples.

example 1 - transport safety

A simple question: "Which mode of transport is the safest?" can lead to pretty much any answer you want. It all depends on how you measure it. To get a meaningful answer we need to define a yardstick we can use to measure safety, typically

Hopefully you can now see how to manipulate the statistics to get the desired answer for your favourite transport mode!  If you're a fan of cycling and walking then do your normalising per minute of travel.  If you like aviation and rail then normalise per kilometre travelled.  Trains, plains and buses typically change order depending on what mix of deaths and injuries you choose to consider.

example 2 - investing your savings

Investing in equities is often described as 'higher risk' relative to investing in fixed interest savings accounts or bonds.  But if your long-term goal is to ensure that your savings keep pace with or ahead of inflation, then adopting a 'low risk' strategy of fixed interest investments (particularly in today's climate of low interest rates) may put you at high risk of failing to meet your longer term goal.

The risk of 'your savings losing value at some point' is different from the risk of 'your savings failing to keep pace with inflation long-term'.   Depending which matters most to you, you may chose a different investment strategy.  Either way, you will almost certainly want to manage both risks as best you can - but the means of doing so may be quite different depending which strategy you adopt.

example 3 - workplace safety

A large organisation we know carried out a comprehensive exercise to identify and prioritise hazards in every single one of its workplaces.  This was a heroic achievement involving virtually everyone in the organisation, and generated a list of some 40,000 issue for action.  Each was characterised in terms of its approximate frequency of occurrence (e.g. daily, weekly, monthly ..) and its severity (potentially fatal, serious injury etc).

The problem here was that different managers used the severity scale differently.  Some classified an issue with ANY remote potential for fatality as 'fatal', while others scaled down the severity to reflect their judgment as to the most likely outcome of the hazardous event in question.  The result was a mish-mash that only got resolved after a good deal of work to redevelop and re-apply a new severity scale that could be calibrated against the organisation's and its industry's actually experience of workplace injuries.

avoiding pitfalls

If you are a busy decision maker who isn't an expert in risk and uncertainty, then you need to appreciate that there is no universal, agreed definition of the measurement scales for risk and uncertainty.  So whether you are asking someone to assess risks/uncertainties for you, or trying to establish priorities for yourself, you need to to be clear about

You should never take for granted that a person who identified and assessed threats and uncertainties for you necessarily adopted a scale or yardstick for measuring them that put them in the order YOU would want them.  In our experience it is not unusual to find that they did not.