When to use it
Use it when estimating the monetary effect of a response using consistent cost and probability assumptions.
Do not allow a positive average benefit to override an unacceptable downside or a binding obligation.
- Define the scope, status date and units before collecting the inputs.
- Substitute the values into the formula and retain their units.
- Interpret the result against the assumptions and decide what evidence or action is needed next.
Formula & inputs
Expected losses and response cost are positive money amounts on the same basis.
Worked example
A gateway delay has a 25% chance of costing €40,000. Spending €5,000 is estimated to reduce the chance to 10%.
The response improves expected cost if those assumptions hold. Assign an owner and plan for the remaining delay exposure.
Common pitfall
Assuming that paying for a response guarantees its estimated effectiveness.
Source & related material
Standard quantitative technique; this explanation is by fannarmaximus. No single inventor is claimed. The arithmetic is computed from explicit inputs, not copied from an official sample question.