What are Risk Attitudes?


Both people and organizations (or companies) have their ways in how they perceive risk and how they deal with it – they have specific risk attitudes. So, there it is – the definition of risk attitude. Risk attitude is the way a person or an organization perceive, react to and deal with risks. Risk attitudes can be described by the means of three properties or themes:

  • Risk appetite
  • Risk tolerance
  • Risk threshold

Let’s look at each of these:

Risk appetite

The amount of risk the individual or the organization is willing to take on (obviously in anticipation of a reward).

For instance, you are okay to buy a $5.00 lottery ticket that gives you a sliver of a chance to win the $50M lottery. And you may not be okay to increasing your chances by spending $50 on it even if it increases your chances by 10 times, because in one case the risk is of losing $5.00 while in the other case the risk is about losing $50.00. Your risk appetite is only $5.00.

Risk threshold

Risk threshold is a point in the risk scale (before the tolerance limit is reached) at which an organization or individual will need to adjust their behavior in order to mitigate reaching the tolerance limit.

Let’s look at an example – Your lighting fixture suddenly stopped working. You decided to fix it assuming it was an issue with the light bulb or the fuse. However, when you checked those, you realized that the light bulbs and the fuse were okay. When you checked with a friend, he mentioned that the issue may well be with the transformer. When you heard that you decided that the risk of messing something up while fixing the transformer by yourself was too high, and you should rather call an electrician. You had crossed the risk tolerance level associated the approach of fixing it issue yourself.

Risk tolerance

The amount of risk the individual or organization can withstand. Beyond this point the whole plan would need to be readjusted in order to avoid or mitigate the risk.

Continuing with the above example, the electrician checks your transformer and your light fixture and tells you that you’ll have to change both the transformer and a part of the fixture. However, he also mentions that the products are no longer produced by manufacturer. So, you may be able to get second-hand fixtures and transformers in eBay, but no one would know of their reliability. At this point you decide to stop pursuing fixing of that fixture and decide instead to buy a new one. You had crossed your risk tolerance limit with fixing the fixture.

 

Anyway, that’s it for now. Please share your thoughts.


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