RISK MAGNITUDE

Risk Magnitude calculation is easier when done with magnitude numbers. Risk Magnitude is
calculated as the sum of the Severity Magnitude and the Likelihood Magnitude. (This is possible
because adding exponents is the same as multiplying integers;

In scientific notation, 1000 x 0.1 = 100 in scientific notation is 103 x 10-1 = 102 , and
10(3+(-1)) = 102). It is to be noted that a frequency of once a year could be considered the "base"
frequency. The Risk Magnitude will be the same as the Severity Magnitude if an Unwanted
Outcome has a Likelihood Magnitude of 0. The Risk Magnitude will be more than the Severity
Magnitude if the Outcome occurs more frequently than once a year and vice versa.

Risk Likelihood and Magnitude

A risk map, also known as a risk matrix, is one of the best ways to show the likelihood and
magnitude of the danger. Risk maps can be created in different formats. A risk map, in whatever style
it is presented, is an extremely useful tool for risk managers. The basic type of risk map shows the
likelihood of an event happening as compared to its magnitude or its effect on its occurrence.

A simple risk matrix also referred to as a heat map, is a common way of expressing the
probability of a risk occurring and the magnitude of the occurrence if it does. The use of a risk matrix
to indicate the probability of the risk occurring and the scale of its occurrence is an important risk
management technique. The risk matrix is adopted to define the nature of a specific hazard,
allowing the organization to assess if the risk is acceptable and falls within the risk
appetite and/or risk capacity of the organization.

Because the word frequency suggests that occurrences will undoubtedly occur, whereas the map is
tracking how frequently these events occur, the term likelihood is used instead of frequency. The
term "likelihood" covers both frequency and the likelihood of unexpected events occurring. However,
the word probability is frequently employed in risk management studies to characterize the chance of
a risk materializing.

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Fig Risk Likelihood and Magnitude

In Figure, the vertical and the horizontal axis denote magnitude and likelihood respectively. As a
single risk map can depict hazard, control, and opportunity risks, the term magnitude is used instead
of severity. The term "severity" refers to the degree to which an occurrence is unpleasant and, as a
result, it is associated with hazard risks.

The figure above plots the likelihood of an event against its magnitude. The impact or
repercussions of the incident, rather than the magnitude of the occurrence, are the most essential
considerations for risk managers.

A huge fire, for example, might completely damage the distribution and logistics of a company's
facility. Though the incident is huge in severity, if the organization has prepared strategies to deal
with it, the total impact on the business could be far less than what would otherwise be expected.

The effect of an event could be considered as the risk-managed level, whereas the magnitude could
be considered as the inherent level of the event. As the effect of an event is often more significant
than the degree of its occurrence, every risk matrix in the upcoming segments will indicate impact
versus likelihood rather than magnitude versus likelihood.

The risk matrix helps in the visual depiction of risk. It is also used to show which risk control
techniques are most likely to be implemented. The inherent, current (or residual), and target levels of
risk can all be recorded using the risk matrix. Color coding is typically used on the risk matrix to
allow a visual depiction of the significance of each risk under consideration. As one moves
toward the upper right-hand corner of the risk matrix, risks become more likely and have a greater
impact. As a result, the risk becomes more severe, which necessitates an immediate and effective
execution of risk control measures.

Consider the uncertainties surrounding the merger of Delta Airlines and Northwest Airlines as a
typical illustration of risk management in action at the strategic level. This demonstrates how
businesses make strategic decisions that are fraught with risk and uncertainty.

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