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Topics: Agile, Risk Management
Risk Tolerance
What is Risk Tolerance and how it differs from Risk Appetite?
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From the PMI´s Lexicon of Terms:
-Risk. An uncertain event or condition that, if it occurs, has a positive or negative effect on one or more
project objectives. See also issue, opportunity, and threat.
-Risk Acceptance. A risk response strategy whereby the project team decides to acknowledge the risk
and not take any action unless the risk occurs. See also risk avoidance, risk enhancement, risk exploiting,
risk mitigation, risk sharing, and risk transference.
-Risk Appetite. The degree of uncertainty an organization or individual is willing to accept in anticipation
of a reward. See also risk threshold and risk tolerance.
-Risk Avoidance. A risk response strategy whereby the project team acts to eliminate the threat or
protect the project from its impact. See also risk acceptance, risk enhancement, risk exploiting, risk
mitigation, risk sharing, and risk transference.
-Risk Threshold. The level of risk exposure above which risks are addressed and below which risks may
be accepted. See also risk appetite and risk tolerance.
-Risk Tolerance. The degree of uncertainty that an organization or individual is willing to withstand. See
also risk appetite and risk threshold.
Risk appetite tends to be a broader, more general statement whereas risk tolerance is usually more specific and might even refer to a single risk.
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1 reply by Sanna Ullah
Aug 19, 2020 12:08 PM
Sanna Ullah
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Are there any factors to define both (Risk Appetite and Risk Tolerance) like Risk Statement?
I agree with Kiron’s statement.

Risk Appetite is the amount of risk an organization is willing to take when it pursues a goal or project.

Risk Tolerance is the amount of risk an organization can tolerate.

There is a fine line between both but some do use risk tolerance per individual risk, whereas they use risk appetite are the total risk that the organization can bear in a given risk profile.
Aug 19, 2020 8:13 AM
Replying to Kiron Bondale
...
Risk appetite tends to be a broader, more general statement whereas risk tolerance is usually more specific and might even refer to a single risk.
Are there any factors to define both (Risk Appetite and Risk Tolerance) like Risk Statement?
I would suggest when using this terminology that a definition be provided within the text of the document.

Industries/companies/individuals may have different interpretations which may lead to misunderstandings, confusion and conflict. Be safe - define your meaning.
Sergio made good points.
The definitions often sound very similar leading to confusion. I look at risk appetite as a desire vs. threshold as a limit.

Some companies want to take on high risk projects as facing those challenges can lead to greater rewards.
“We choose to go to the Moon in this decade and do the other things, not because they are easy, but because they are hard..." JF Kennedy.

Tolerance on the other hand is how much risk we are willing to accept. That could be a cost limit, whether some failure could have catastrophic results, legal issues, or some other negative outcome.
Sergio made good points.

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