A probability-impact risk matrix is a two-dimensional graphic representation of the risks facing a given organization or entity, from an individual to an entire planet. The probability of an event is plotted against the potential negative impact of that event.

Preparation of Probability-Impact Risk Matrix

1. Determine the Data to Use

Decide on the type of data that will go into your matrix. You may use data from prior research, or you may make a survey of informed people. In a survey, you might ask people to rate impact and probability on a truly quantifiable scale (“How much money would the firm lose?” or “What is the probability, 0 to 100 percent, of this occurring within a five-year time frame?”). Alternatively, in a survey, you might ask people to rate impact on a looser scale (“Rate the negative impact of this event on a scale from 0, for no impact, to 10, for catastrophe”).

2. Decide on the Size of Your Matrix

Decide on the size of your matrix. The simplest matrix is 2 x 2, with high and low levels each for impact and probability. A 3 x 3 involves three levels each: high, moderate and low, for impact and probability. Some matrices use even more levels.

3. List Events to Include in the Risk Matrix

List all events to be entered into the risk matrix (for example, “fail to obtain patent,” “terrorist attack”). Make an Event Coordinates Table with five columns. Label the first column “Event,” and in that column write all the events you have listed. Label the second column “Impact,” the third column “Probability,” the fourth column “Impact Sector” and the fifth column “Probability Sector.”

4. Gather Impact and Probability Data

Gather impact and probability data for each event. If you use survey data (for example, “What’s the probability that Event X will occur?”), average your survey data to a single figure. If you use previous research data, you will have to use some method (like weighted averaging) to come to a single figure for probability and impact of each event.

5. Enter Impact and Probability Data

Enter final data for impact and probability for each event into the Event Coordinates Table. Enter the data in the “Impact” and “Probability” columns, respectively.

6. Determine How to Categorize Impact Data

Determine how to categorize your impact data. If you have a 2 x 2 matrix, you might set a “High Impact” event as anything above the midpoint of the range of your figures for impact. For example, if the range of potential financial losses is $0 to $20 million, you might set the dividing line between “High Impact” and “Low Impact” events at $10 million. Alternatively, you might set the dividing line arbitrarily; for example, perhaps any losses above $1 million are “High Impact.”

The same decisions must be made for a matrix of size 3 x 3 levels or more: You must determine the boundaries of your “High Impact,” “Moderate Impact,” and “Low Impact” areas. Write the categorization of the impact data for each event – for example, “High Impact,” “Moderate Impact,” and “Low Impact” – in the “Impact Sector” column on the Event Coordinates Table.

7. Determine How to Categorize Probability Data

Determine how to categorize your probability data. If you have a 2 x 2 matrix, set a “High Impact” event as anything above 50 percent in probability. With a 3 x 3 matrix, divide the probability range equally across the three areas of “High,” “Moderate,” and “Low Probability.” Write the categorization of the probability data for each event – for example, “High Probability” or “Low Probability” – in the “Probability Sector” column on the Event Coordinates Table.

Construction of the Risk Matrix

1. Draw the Outlines of the Probability-Impact Risk Matrix

Draw the outlines of the Probability-Impact Risk Matrix. This is a two-dimensional chart, with “Impact of Risk” being one axis (say, the positive y-axis) and “Probability of Risk” being the other axis (say, the positive x-axis). Draw in the categories you decided upon earlier, in Section One, Step 2, for the Probability and Impact axes.

2. Place Events at the Appropriate Sectors

Place events in the matrix at the appropriate sector. Use the “Impact Sector” and “Probabilities Sector” columns of the Event Coordinates Table to determine the correct placement of each event within the matrix.

3. Document Your Choices

Document your choices. In notes appended to the matrix, describe how you collected your data for event impact and probability (Section One, Step 4). Describe the boundaries of the regions for the Impact and Probability axes of the matrix (Section One, Steps 6 and 7).