How to Measure Risk Appetite

August 2013 Bonus Resource

By Diana Del Bel Belluz, M.A.Sc., P.Eng.

Last fall I had the pleasure of co-presenting a session on Risk Appetite with Rob Quail of Hydro One Inc. He shared a novel approach that he documented in his article Defining Your Taste for Risk.

The article provides a scale to help people gauge their risk appetite along this continuum:

 continuum

In his article, Quail explains that risk appetite is context dependent. He then goes on to illustrate the 5-points on the risk appetite continuum along four dimensions (philosophy, tolerance for uncertainty, choice, tradeoff) that assist people to apply the scale to any particular strategic objective or risk. At the "Averse" end of the continuum, extremely conservative risk-taking and risk management behavior is expected, e.g.:

  • Philosophy: "Sacred" – avoidance of risk is a core objective
  • Tolerance for uncertainty: Extremely low
  • Choice: When faced with multiple options, will choose the one with the lowest risk, always
  • Tradeoff: Will never trade off this objective against others Will take justified risks

Whereas at the "Open" end of the continuum, a more aggressive stance is encouraged, e.g.:

  • Philosophy: Will take justified risks
  • Tolerance for uncertainty: Fully anticipate uncertainty or volatility in results
  • Choice: When faced with multiple options, will choose the one with the highest return and accept the possibility of failure
  • Tradeoff: Willing to trade off this objective against others

Of course, each organization must customize its own scale to reflect its particular business context. The scale is a key tool to:

  1. Define the target risk appetite with your executive leadership team and board. This sets out the expectations for risk-taking behavior.
  2. Measure the actual risk appetite and identify any gaps between exhibited and desired levels.
  3. Evaluate and align risk appetite across the organization to enhance performance.

 

Don't miss out on this exclusive opportunity to discuss your risk appetite challenges with the experts

Rob will be one of the featured speakers at the Risk Appetite Seminar hosted by Risk Wise on November 14, 2013 in Toronto. The seminar agenda includes a live simulation that brings to life the key concepts in Rob's article, an opportunity to discuss your risk appetite challenges with Rob and other executives fwho have implemented risk appetite concepts in their organizations. For information on the seminar, please contact me at This email address is being protected from spambots. You need JavaScript enabled to view it.?subject=Request%20for%20Information%20on%20Seminar">This email address is being protected from spambots. You need JavaScript enabled to view it. or visit our Events page.

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Not yet a subscriber, but want to access these special offers?

When you subscribe to the Advisory, we'll send you the code for all current special offers along with a link to your New Subscriber Bonus, a copy of Moving Beyond the Risk Map to Operational Vigilance.

FIND OUT FOR YOURSELF why risk management leaders subscribe, click to access the ARTICLE INDEX of all past issues of the Risk Management Made Simple Advisory.

"I save and study each issue of the Advisory. I appreciate how Diana gives very practical advice and links it to fundamental theories and best practices." 

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Diana's Pick

The Neuroscience of Enterprise Risk Management (written by Diana Del Bel Belluz of Risk Wise) expores findings from the field of neuroscience and shares practical tips on how to apply them to enhance individuals' risk management thinking and implement brain-friendly ERM practices in organizations.

The article was published by The Conference Board of Canada in the Autumn 2017 issue of the journal Risk Watch.