Risk Appetite and Risk Tolerance are two terms often confuse the professionals especially PMP Aspirants who are preparing for PMP Exam as they are very close terms. Though both Risk Appetite and Risk Tolerance are defined in the PMBOK but the explanation is so abstract that people hardly make out any difference. Also in practice these terms are loosely used for the same purpose. Let’s look at the difference between them
Risk Appetite Vs Risk Tolerance
Risk Appetite is at high level and shows the policy or the attitude of stakeholders or organizations if they are willing to take risk or not to achieve their strategic goal. While Risk Tolerance is at lower level and shows how much risk is acceptable within a specific category, an organization unit or a specific area.
An organization can be called having higher risk appetite related to its strategic goal if it is willing to accept higher losses in the pursuit of higher returns.
So if an investment company ready to invest in a new startup venture as they expect higher returns if the venture is successful, it has higher appetite. But there is always a bar. Company further says, if there are 50% chances of losing the 50% investment, the company is not willing to invest. This is its Risk Tolerance.
Let’s take another example.
A hospital has low risk appetite related to emergency ward while higher appetite to general ward. – Risk Appetite.
The hospital attends to an emergency patient within an hour but respond within 15 minute to attend a critically ill patient. On the other side, a patient in general ward may take upto 3 hours – Risk Tolerance.
Risk Appetite is more subjective and difficult to measure. It shows the nature or inclination and is at policy level. While the Risk Tolerance is more measurable and specify limits beyond which company or stakeholders are not willing to take risk.
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