I get this all the time from my risk management students: "We do a risk register and weight all the risks".
But when quizzed about this, it turns out that the students aren't talking about weights, they're talking about probabilities.
Weights and probabilities are really not the same idea. They describe different things. One is about strength or influence; the other is about uncertainty. One has a 'par' value; the other is a number between 0 and 1 (can't happen; will happen, respectively) for which all related numbers sum to 1.0
- As a portfolio manager, I may overweight (or underweight) my portfolio-- relative to a par value -- with projects of a certain class -- like semiconductor projects or projects with pharmaceutical content
- As a portfolio manager, I assess the probability of a certain risk -- like curtailment of resources -- as an event that would impact my projects
It should be obvious, but I'll say it anyway:
- Weights need not sum to 1.0; and in general, they do not
If only once, as an example, then the probability of such an event is estimated to be 10%. And, by correspondence, the non-event has a probability of 90%, thus accounting for the entire event space. (You guessed it: event space = event + non-event)
Bottom line: watch your weights!
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