Using our lightening strike mentioned earlier, the probability of it actually occurring is very low, but the severity of it is high. Therefore, this risk would fall into category three. There are many example of risk and each one can be categorized into one of these four quadrants. If a risk has a high likelihood of occurring and if the consequence of it occurring would be severe, it would be in category four. Risks which are both unlikely and minimally harmful would be in category one. The next step is to consider the possible methods for handling the risk and selecting the best option.
Here’s a brief description of each quadrant. Certain risks can be avoided. For example, if you never drive drunk or skydive or bungee jump, these risks pose no threat. Again, certain risks can be avoided. Next, can the risk be reduced? For example, if you eat right, get plenty of sleep, exercise, avoid unhealthy habits, etc., you may be able to reduce your chance of a premature demise. We also realize that smoking causes lung cancer. Therefore, if we quit smoking, we can reduce the chance of getting lung cancer. Quadrant three, transferring risk, involves strategies such as buying insurance or lowering our deductible. By paying a premium, we can transfer all or part of a risk to the insurance company. Finally, for those risks which cannot be avoided, reduced, or transferred, we have no option but to retain them. You should never spend a lot of money to manage a risk which has a minimal consequence. In fact, it may be best to ignore risks which fall into category one.