Assumptions and method
Do not treat mean exposure as a confidence-level reserve. Common causes and dependency change the variance.
Test a scenario
Use the result in a decision
Describe events, consequences and assumptions before assigning numbers.
Do not treat mean exposure as a confidence-level reserve. Common causes and dependency change the variance.
Set a baseline and change one assumption to compare outcomes.
A worked example
Follow the fixed teaching example
- Expected loss = 0.2 × 15,000 + 0.1 × 8,000 = 3,800.
- Under independence, variance = 0.2×0.8×15,000² + 0.1×0.9×8,000² = 41,760,000. Take its square root for standard deviation.
These illustrative inputs describe a project scenario, not a published benchmark. All monetary inputs use the same currency and price basis.
- One row per independent risk: probability %, loss
- 20, 15000 10, 8000
- Sum of expected losses
- 3,800
- Standard deviation if independent
- 6,462.1978
Interpret the output only within the assumptions above. Changing the inputs changes the result; it does not validate the inputs.
Source & credit
Standard estimating practice; the cited guide documents use rather than claiming invention.
GAO: Cost Estimating and Assessment Guide
This is independently written code and explanation of the underlying method. The linked publication, its diagrams and its trademarks remain its owner’s material; no permission to reuse them is implied.