How much risk will your project take on? There are three similar measures we use. I want to explore the comparisons between: Risk Tolerance, Risk Appetite, and Risk Capacity.
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Risk Appetite, Risk Tolerance, and Risk Capacity
Hard to Distinguish
I would venture to suggest that few Project Managers – especially those who don’t specialize in risk management – would be able to clearly distinguish Risk Tolerance, Risk Appetite, and Risk Capacity.
Indeed, these terms are often used interchangeably. I am not aware of any absolute and definitive definitions of any of them. So, we need working definitions that draw meaningful and, more importantly, useful distinctions between them.
So, let’s have a go.
Risk Appetite
Risk Appetite is the amount of risk a project or organization is willing to accept or retain, in pursuing its objectives.
It is about cultural, emotional, and psychological attitudes to risk. We often describe people or organizations as risk-averse, risk-accepting, and risk-taking. This is about their appetite for risk.
Risk Tolerance
Risk Tolerance is the amount of risk a project or organization can handle.
It is related to their ability to cope with the outcomes of a risk should they occur. Do they have the right systems, processes, resources, and controls in place to deal with and therefore ‘tolerate’ a level of risk?
Risk Appetite vs Risk Tolerance
While risk appetite is about how much risk an organization is prepared to pursue, risk tolerance is about what that organization can actually cope with.
Or, put another way, risk appetite is about how much risk an organization is willing to accept, and risk tolerance is about how much risk an organization can accept.
Risk Capacity
Risk Capacity is the amount of risk a project or organization can take on without jeopardizing their financial stability or other key objectives.
Risk Tolerance vs Risk Capacity
While Risk Tolerance is about how much risk the organization can cope with in terms of its processes and systems, Risk Capacity is about how much loss the organization can bear, arising from the risk.
In Summary
Recommended Videos to Help with Risk Management
Carefully curated video recommendations for you:
- Risk Management 101: An Introduction to Project Risk Management
- 4 Types of Project Risk – Different Forms of Uncertainty | Video
- Project Risk Management – How to Manage Project Risk | Video
- What is a Residual Risk & What is Secondary Risk? | Video
- Risk Identification: How to Identify Project Risks | Video
- How to Create a Risk Management Plan | Video
- 5 Ways to Remove a Risk Entirely | Video
- What to Put in Your Risk Register (Risk Log) | Video
Recommended Articles to Help with Risk Management
- Ultimate Guide to Project Risk Management
- 10 Things Project Managers Need to Know about Strategic Risk Management
- Spotting Project Threats: How to Find the Sources of Project Risk
- The Project Manager’s Guide to Simple Risk Analysis
- Every Project Management Risk Response Strategy: Are there 6, 7 or more?
What Kit does a Project Manager Need?
I asked Project Managers in a couple of forums what material things you need to have, to do your job as a Project Manager. They responded magnificently. I compiled their answers into a Kit list. I added my own.
Check out the Kit a Project Manager needs
Note that the links are affiliated.
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