Risk tolerance, risk threshold and risk appetite?

Wael Haddad Project Manager, Electrical Electronics Communication Engineer,MEP Manager, MCSE| Snafee UAE Contracting LLC Dubai, Dubai, United Arab Emirates

How we can differentiate between, risk tolerance, risk threshold and risk appetite? and how we use them?
As per PMI standard and PMBOK:

Tolerance: The quantified description of acceptable variation for a quality requirement.

Risk Threshold: A measure of the level of risk exposure above which action must be taken to address risks proactively, and below which risks may be accepted.

Risk Appetite: The degree of uncertainty an organisation or individual is willing to accept in anticipation of a reward.

Is there another way to remove the ambiguity and confusion of these jargon

Posted: Jun 2, 2020 5:47 PM (Updated by author: Jun 2, 2020 6:00 PM)

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Tarun Nair Adoor, Kerala, India

Jun 03, 2020 3:47 PM

Replying to Wael Haddad

...

Thanks all for your input and valuable contribution in this discussion,

As per Risk Doctor/ David Hillson, Risk Tolerance could mean the “APPETITE” how much we will bear, or it could mean the “THRESHOLD” plus or minus measurement,
So risk “TOLERANCE” is particularly unhelpful term in the risk management because it’s ambiguous, it has two potential meanings, and for that reason Risk Doctor/ David Hillson would recommend that we don’t use it.
what do we mean actually by risk tolerance we think about? when we say tolerance is it how much we’re prepared to bear which is then really risk “APPETITE”, Or do we mean something that we can measure with a plus and minus boundary In which case we mean “THRESHOLD”, and he prefer not use this confusing look phrase at all “TOLERANCE”

I would differ a bit on your define for appetite "how much we will bear".
It would be rather "how much we are willing to bear"
It is possible that we can bear much higher risk, but are not willing to take.
I would agree the second part "it could mean the THRESHOLD plus or minus measurement"

I would also agree that TOLERANCE is not so useful term in particular and would be more meaningful to use appetite and threshold.
I think PMI also has the same view and the defined term is "Risk Tolerance [deprecated]"

Posted: Jun 3, 2020 8:04 PM (Updated by author: Jun 3, 2020 8:12 PM)

Keith Novak Tukwila, Wa, United States

There is a very practical benefit to considering individual risks (tolerance per some definitions) and total/aggregate risk (appetite.)

Consider a project where there is only one risk, but it is catastrophic failure leading to loss of life. That risk is unacceptable, but may be avoided or mitigated and the project may still be very viable.

Consider another project, where no risk is near that level of impact, but every aspect of the project has a high likelihood of going off-plan. That project may be too risky for stakeholders due to the high likelihood of eventual failure, as the project may be constantly facing numerous issues simultaneously, limiting the ability of the team to recover.

Posted: Jun 4, 2020 10:57 AM (Updated by author: Jun 4, 2020 10:58 AM)

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Risk tolerance, risk threshold and risk appetite?

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