Defining Risk Appetite & Risk Threshold

By: Chizubel Egwudo

The very basic way to define risk appetite can be likened with eating food. When we think of food, if faced with a choice of whether to go to work on an empty stomach, a number of factors surface, such as tolerance level (at what threshold would individual performance be impacted and how does it affect productivity?)

The same can be said for business. Risk Appetite for an organization can mean, the cost that an organization is willing to part with over a specified period in pursuit of business gain.

It is essential to establish risk appetite to help gain a balance between engaging in spending initiatives and being excessively cautious to investments, therefore stifling growth.

As with the example of food mentioned earlier, organizations need to review their risk appetite regularly to adapt with business demands.

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