There can be no project that is immune to risks. There is no question whether a project faces risks or not, it is only about how risks are managed as they occur. Proper risk management is the responsibility of every Project Manager. In this article, we shall see what risk is, and we shall also understand the various terms related to risk such as Risk Attitude, Risk Appetite, Risk Threshold, Risk Appetite, Risk Averse.
Let’s first understand “Risk”.
What is Risk?
PMBOK definition: “Risk is an uncertain event or condition that, if occurs, has a positive or negative effect on one or more project objectives. “
Based on the above definition, risks can be classified into 2 types 1) Positive risks 2) Negative Risks
Positive Risks: These are the risks, if managed properly, can result in a positive effect on one or more project objectives.
Negative Risks: These are the risks, if managed properly, can result in a positive effect on one or more project objectives.
Now that we have understood what “risk” actually is, we shall see some risk management terms which are commonly used.
Risk Management Terms discussed below are
- Risk Attitude
- Risk Appetite
- Risk Tolerance
- Risk Threshold
- Risk Averse
It is the way of one’s thinking or feeling or behavior towards risk. It is about how one perceives risk.
Everyone has a specific behavior towards risk, some actively embrace risk, some tend to avoid risk. This depends on one’s Risk Attitude. Risk Attitudes are driven by Perceptions, Tolerances, and other biases.
Organizations and stakeholders would be willing to accept varying degrees of risk depending on their Risk Attitude.
PMBOK defines it as ” It is the degree of uncertainty an organization or individual is willing to accept in anticipation of a reward.“
If an organization is willing to take more risks, then we can say its Risk Appetite is high, and if an organization doesn’t take many risks then we can say that such an Organization’s Risk Appetite is low.
PMBOK 5 defines it as “It is the degree, amount, or volume of risk that an organization or individual will withstand”.
Basically, Tolerance is a range. Values in this range can be tolerated or accepted, but values outside that range cannot be tolerated or accepted. In simple words, Risk Tolerance is the measurable amount of acceptable risk.
If one can take more amount of risk, then we can say that he/she has high-risk tolerance, similarly if one can withstand a less amount of risk, then we can say he/she has low-risk tolerance.
Difference between Risk Appetite & Risk Tolerance
Risk Appetite is about the willingness to take on risk, on the other hand, Risk Tolerance is about the maximum amount of risk an individual can withstand.
It is a specific point (quantity or volume) of risk, above which the amount of risk becomes unacceptable.
Below the point of Risk Threshold, an organization will accept risk. Above the risk threshold, an organization will not accept or tolerate the amount of risk.
It is not wanting to take risks or avoiding risks.