The risk equation and its key components, risk, likelihood and impact, provide the basic approach to determining and prioritizing risk of various security threats faced by an organization. The meaning of this simple equation is that risk is determined both by how vulnerable you are to each threat (and therefore how much impact it will have on you) and how likely it is that the specific threat will actually occur.
There are a standard set of definitions for describing impact in order to further standardize risk analysis. In order of increasing harm, they are: Negligible • Minor • Moderate • Severe • Critical
To further standardize risk analysis, a standard set of definitions for describing likelihood in order of increasing odds of the event occurring are: Very unlikely • Unlikely • Moderately Likely • Likely • Very likely/Imminent A useful method for analysing risk using the descriptors above is called the Risk Matrix. This analytical tool allows users to graphically index the two risk factors into a single analysis. The results of plotting possible threats on the matrix shows clearly the ranking order of threats on the basis of their risk to the organization, and thereby provides managers a guide by which to prioritize risk reduction activities. Even though the process is straightforward, responsible use of the Risk Matrix requires more than simply filling in threats on a chart. Some practical guidance on developing and updating your risk matrix is required:
Biases, or systematic errors, that apply to the assessment of risk include: recency bias, media bias, control bias, acceptance bias, impact-likelihood blurring and confirmation bias. Biases are extremely prevalent, and can cause significant errors when analysing risk. For this reason it is important for risk managers to try to understand and overcome biases when making risk assessments.