Lessons · Project management · expected monetary value
Expected monetary value: probability times impact
The expected monetary value of a risk is its probability multiplied by its impact in dollars; threats are negative, opportunities positive, and the sum across the register is the money the risks are worth.
Hone is a place to practise a career, one idea a day. This is one of its lessons, written out in full and free to read without an account.
In beta. This lesson was written for Hone and has not yet been checked by an experienced project manager. Practice material, not professional advice. What that means.
What it is for
The sponsor asks why you want $16,000 of contingency. Because three risks at 20%, 50% and 10% of $30,000, $10,000 and $50,000 are worth $16,000 between them. It is the one argument for reserve that a finance director accepts, because it is arithmetic.
How to think about it
For each risk, multiply probability by impact. Keep the sign: a threat is a negative number. Add the register up. That total is what the risks cost on average, and it is the first estimate of contingency.
Worked example
R-03: 30% chance of a $20,000 delay costEMV = 0.30 × (−20,000) = −$6,000
R-05: 10% chance of an $80,000 reworkEMV = 0.10 × (−80,000) = −$8,000
R-06: 25% chance of a $12,000 early-finish bonusEMV = 0.25 × (+12,000) = +$3,000. An opportunity is a risk with a plus sign.
Register EMV = −6,000 − 8,000 + 3,000 = −$11,000What the register is worth. The opening bid for contingency.
Your turn
A risk has a 40% chance of costing $25,000. Write its expected monetary value.
EMV = 0.40 × (−) = −$10,000
Solve one, graded on the server
The trap
Reading EMV, the expected monetary value, as what will happen. Nothing costs $6,000 on the day; it costs $20,000 or nothing. EMV is the right number for the register and the wrong number for any single risk.