61 What is the difference between risk appetite and risk tolerance?

[@turkithemaster2841]

We could refer risk appetite to positive risks and risk tolerance to negative risks!

[@Risk-Doctor]

Hi Turki, thanks for your comment. Actually you are not quite right. The key difference is internal/external. "Risk appetite" is an internal drive to take risk - this covers taking all types of uncertainty, including both positive risks (opportunities) and negative risks (threats). That internal risk appetite drive must then be expressed in a way that is measurable. The expression of how much risk we're prepared to take is called either "risk tolerance" or "risk thresholds". These are upper and lower bounds of how much risk is acceptable to us. I prefer to use the term "risk thresholds" as it is more clear. The term "risk tolerance" is like an engineering tolerance on a measurement - it describes the bounds of acceptable error around a measured value. So risk tolerance is the bounds of acceptable risk variation around an objective. I hope this makes things more clear. Thank you again for your comment.

[@msond177]

Hi Dr. David Hillson, it would be great to hear your journey on your career development over the years, to hear some details and hurdles you’ve faced as a young Project Manager to where you are now. Thank you!

[@Risk-Doctor]

Try this interview: kzbin.info/www/bejne/nWS0lJ2AgtOIn7M In it I talk about some of my past experience. I hope you find it interesting!

[@msond177]

@@Risk-Doctor thank you!

[@natashatarapow7558]

Exactly what I thought while studying these terms for the CAPM exam, all these terms overlap a lot. I'm still confused on how I would answer some of these single selection questions. If they drop the definition of risk tolerance I feel like I could choose any of the terms and somehow be correct and incorrect at the same time lol. Besides that, I'll probably follow your advice when using the term myself. Thanks!

[@Risk-Doctor]

Thanks Natasha. My personal view is that PMI and some of the other professional bodies are not completely clear on these different risk terms, and this is reflected in the certifications. I'm glad this short video helped to clarify things a little for you. I'm also glad that you'll "probably" follow my advice!! ;-)

[@mahmoudelsebaie5757]

We may need from you to give an example or case study and define from this example the risk Appetite, Tolerance and threshold

[@Risk-Doctor]

Thanks for this suggestion Mahmoud. We didn't have time in this very shor video to give detailed examples, sorry. But there's a slightly longer version here (10 minutes, kzbin.info/www/bejne/m4Pbk2yAnMiEkNU), and a full presentation here (70 minutes, kzbin.info/www/bejne/nnq0mpSEhctpl80). I hope this is helpful.

[@kylelin1201]

This is surely a very confusing topic. I would like to think among the risk universe, we have risk capacity which is the upper limit of threshold an organization can take, and then risk appetite which is the level of risk an organization willing to pursue. In between would be the risk tolerance which is above the risk appetite but within the risk capacity, hence tolerable but not preferred or actively pursued. Is it appropriate to describe this way?

[@Risk-Doctor]

Thanks for adding your perspective. In fact there is not universal consensus on the precise meaning of these terms, which is why people get confused between them, In this video I offer my view on the best way to define and use these terms. But if you prefer something else, that's fine - as long as everyone else understands and uses them the same.

[@harshdeepsingh3627]

Are Risk Capacity and Risk Tolerance, one and the same ?

[@Risk-Doctor]

Thanks for this important questionHarshdeep. The answer is No, they are different. In the Risk Doctor Glossary, we have these definitions: * Risk capacity: Amount of risk that an entity can bear, quantified against objectives * Risk thresholds: Quantified measures that represent upper and lower limits of acceptable uncertainty against each objective (see also risk tolerance). * Risk tolerance: The acceptable variance around an objective (also known as risk thresholds).

[@vuthang3953]

thanks, this is useful

[@Risk-Doctor]

You're welcome!

[@kodkid]

that did not help at all. Don't use the phrase, hmmmm... Ok, thanks.

[@Risk-Doctor]

I'm sorry this wasn't helpful for you. In my view, the term "risk tolerance" is so ambiguous that it's better not to use it. The other terms "risk appetite" and "risk thresholds" are more clear. But I know other people have a different view, which is fine. Thanks for your comment.

[@raymondphilip6232]

Risk appetite is the MINIMUM risk you can take Risk tolerance is the MAXIMUM risk you can take

[@Risk-Doctor]

Hmm, I'm not sure I agree. The Risk Doctor Glossary has these definitions: * Risk appetite: Tendency of an individual or group to take risk in a given situation. * Risk thresholds: Quantified measures that represent upper and lower limits of acceptable uncertainty against each objective (see also risk tolerance). * Risk tolerance: The acceptable variance around an objective (also known as risk thresholds).