by CIO Staff

Understanding Probability Curves

Jul 01, 20032 mins
Risk Management

The Basic Curve The basic probability curve looks like an anthill. Here, the X axis represents potential outcomes from worst to best, going left to right. The Y axis represents the probability of those outcomes, from lowest to highest, going bottom to top. The highest point on the curve indicates the most likely outcome of the risk. The best case falls at the far right and worst case far left, both with the lowest probabilities of occurrence.

A steeper, narrower curve (the red line) represents more certainty about the outcome, since more potential outcomes fall in a smaller range. A low, broad curve (the blue line) represents less certainty about a risk’s potential impact on a project. With this understanding, you can determine the likelihood of potential risk outcomes with a quick look at a distribution chart.

The Optimistic Curve While steepness of the curve indicates certainty, its tilt describes relative outlook. A risk distribution that tilts to the right represents a more optimistic outlook, since the higher probability results are closer to the best possible outcome.

The Pessimistic Curve On the other hand, a curve that leans to the left shows a more pessimistic view of the risk, since there’s more probability that the outcome will fall on the worst-case side of the spectrum.