Risk Appetite and Risk Tolerance

Today’s world has been described as VUCA (volatile, uncertain, complex, and ambiguous). It’s a world where it’s impossible to tell real news from fake news. The only certain thing is that “nothing is certain”.

The bungee jump that was…

Early this year, on a Friday afternoon, we successfully concluded a forensics assignment for one of our manufacturing clients in Jinja. At Summit Consulting, when an assignment is executed beyond client expectations, we celebrate. This was one of those celebration days. With a colleague, we agreed to go for an excursion. We headed to the Nile High Bungee in Jinja.

I love extreme sports. Bungee jumping is one of the most extreme sports. It gives an adrenaline rush like no other. It had been on my list of must-do adventures for years. The opportunity was at hand for this nerve-wracking experience. As for my colleague, he told me he had never liked bungee jumping.

We took the car and in 15 minutes, arrived at the place. From the car park, we walked to the reception area, besides a cafe and a shop (with all kinds of bungee souvenirs).

The preliminaries

I filled in a health questionnaire and signed an indemnity waiver form. I was asked to empty my pockets and remove all loose items and asked to step on the scales! My weight was taken so that the Bungee instructors can calculate the length of my bungee rope.

The adrenaline rush…

I headed close to the jumping platform and watched a few jumpers jump. Frightened, I got into my safety harnesses and waited (in the queue) for my turn. With a zillion thoughts racing through my mind, I said my “last” prayer. When my turn came, I sat down and the instructor put my legs together and wrapped a thick towel around my lower legs and ankles, ready for fastening. Aware of what was to follow, I could not take this anymore. I said it was over! I stood, unwrapped the towel from my lower legs, and walked back as I removed the harnesses. I still wanted to live.

The assessment …

My love for bungee jumping (risk appetite) was high but my willpower to bungee jump (risk tolerance) was low.

What is Risk Appetite?

Risk appetite is the level of risk that an individual/organization is willing to take on while pursuing its objectives. Bungee jumping was on my bucket list. My risk appetite was high. Whereas my colleague (who didn’t like bungee jumping), risk appetite was low.

Individuals in the same organisation have different ways of evaluating risk and taking action. Some are very cautious, while others are very risk-taking. Also, different functions within an organization will have different perspectives around risk and this calls for harmonisation.

Defining the level of risk appetite for an organisation is often the first step to deepening and broadening the understanding and shaping of the risk management strategy.

How about Risk Tolerance?

Risk tolerance is the degree of uncertainty an individual/organization is willing to withstand regarding each relevant risk. In organisations, while risk appetite differs from person to person, risk tolerance is usually estimated after considering several factors and circumstances.

During this excursion, much as my risk appetite (for bungee jumping) was high, my risk tolerance was low. I could not experience what I so much desired. Undeniably, the only certain thing is that “nothing is certain”.

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