Risk is all about planning for what might happen, rather than what is most likely to happen, or even what is likely to happen on average. These can be very different – consider a parachute jump where the most likely outcome is a safe landing, the worst case is fatal and the average of these is meaningless. Traditional business planning uses a single scenario, usually the most likely. If there is a second, it is often a worst case scenario. The most likely scenario largely ignores risk and the worst case is difficult to use for strategic purposes without knowing how likely it is to occur. Statistics and probabilities are critical to understanding this variability and certainty.
Knowing that we can’t know what will happen with certainty, how can we estimate a spectrum of what might happen? At the broadest level, we need to attach probabilities to what might happen, and then combine these probabilities statistically to understand the overall effect of the possibilities and the likelihood of these possibilities occurring.