About this calculator
The Risk Calculator assists you to measure and compare the possible risk of various options so that you can make smarter decisions. Risk is determined by multiplying the likelihood of failure with the amount that will be lost in case of failure. This provides a rational, quantitative method of visualizing the decision that puts you at more risk.
How to Use the Risk Calculator
Risk Calculator Instructions. Risk Calculator is extremely easy to use. All that you need to do is to enter in probability of failure of each option and the loss you would make in the event of that failure. These two values will get multiplied automatically by the calculator to bring you the total risk. The risk values would be compared to each other to compare two or more choices. The alternative that has the lower risk value is usually safer because it means having a lesser probability of experiencing huge losses.
Understanding Risk
In its simplistic definition, risk is loss or negative gain when making a decision in the environment of uncertainty. It brings together two factors; the probability of something not going down and the effects in the event that it does. That is, risk is not only the probability of failure, but also the cost of failure in case failure occurs.
In a real world scenario, risk can be mathematically expressed as:
Risk = Probability of failure xPossible loss.
With this formula we are able to compare situations that are extremely different with each other on one scale. To take an example, a project that will incur a minor loss with a high probability may be less risky than a project that can incur an enormous loss with a very low probability. The risk value assists you to compare options with each other, rather than just be guided by intuition.
The numbers, however, tell but half the story. Risk in practice is also dependent on contexts and tolerance, as well as hidden influences. A small numerical risk can be intolerable in any safety-predominant industry, whereas a large one can be just fine when there is a reward value of high possibility attached to it.
Risk vs Reward
The terms risk and reward are often used together to describe the relationship between the potential downside and potential upside of a decision. Typically, decisions with high potential reward come with a high degree of uncertainty or risk, while decisions that are considered "safe" have a low potential reward.
Opening your own business, for example, comes with the risk of losing your invested money if the business fails, but also carries the potential to gain a higher return if your business is successful. Putting your money into a more established and stable venture may be less risky, but also offers a smaller potential reward.
That said, just because something is riskier does not mean it is a bad decision. Nor does something with low-risk automatically make it good. All that matters is whether the potential reward justifies the risk being taken.
For this reason, risk and reward should always be weighed together. A person who is less risk adverse may take on more risk with the hopes of earning more reward, while another person who values their investments or holdings more heavily may choose an option with less potential loss.