Back when I first started compiling tenders for Engineering contracts, we used to add 10% to cover what we called ‘contingencies’. This was meant to cover all the things you hadn’t thought of, or that might go wrong once you actually had to perform the contract.
By the end of my career I was working on high value defense contracts. In place of the arbitrary 10% contingency, these included a far more scientific analysis of ‘risk’. A database was maintained in which was listed all the things that any member of the team thought could go wrong, along with the estimated cost of dealing with it.
Say the aerodynamic testing of an electronics pod in a wind tunnel showed that it could destabilize the aircraft under certain conditions; what would it cost to redesign the pod? What effect would such a need for redesign have on the contract timetable? That possible outcome would be included in the risk database. Alongside would be the estimated likelihood of this actually happening as a percentage.
Something considered highly likely would have a 90% probability; something that was on the outer fringes of possibility might be assigned 1%. The estimated cost of dealing with the problem would then be multiplied by the probability of it occurring to give the figure to be included in the contract price. The combined total of all these individual ‘cost x probability’ sums would become the ‘Risk Budget’ for the contract.
Things with a high probability combined with a high cost would be considered for mitigation activity. In the example above this might entail creating a computer model to analyze the aerodynamics of the pod. The cost of carrying out this extra work would be funded from the ‘Risk Budget’.
Gamblers apply the same process in assessing the probability of an opponent holding a trump card.
Dilbert creator, Adam Scott has come up with a similar procedure for analyzing the statements of politicians like D Trump. In a blog post on 8th December he applied it to Trump’s suggestion that the US government should ban foreign Muslims from entering the country. He concludes that it is all part of Trump’s strategy to keep his name in front of the electorate. The publicity generated is weighed against the possibility of opprobrium received.
Just as the defense company considers everything that could possibly go wrong, so Trump analyzes the risk to his campaign success of every utterance. He calculates that playing on the fears of citizens will generate more support than he will lose as a result of accusations of racism or sexism.