Risk Appetite – is using this concept worth the risk?

The NZ Society for Risk Management published an article from Grant Purdy in its RiskPost in September 2011. Grant describes how have been using the term risk appetite for many years. It is used regularly in the media and all the major consultancy groups and many professional associations with an interest in risk management discuss the term and describe its interpretation and application. Now regulators are asking companies to prepare statements of their risk appetite as part of their governance processes. The concept of risk appetite seems deceptively simple: it is often described as how much risk we might wish to take to achieve a desired return. In practice, however, an organisation’s risk appetite can be exceedingly difficult to tie down or define. Although many authors discuss risk appetite, most of the current definitions are vague, ambiguous and contradictory, and the gap between theory and practice is often wide. Efforts to quantify risk appetite can sometimes produce an illusion of precision while, in practice, the resulting statements are of little practical use. Just to add to the confusion, the equally rubbery phrase 'risk tolerance' is also often used at the same time as risk appetite. The two terms are often used interchangeably and sometimes appear to have overlapping definitions.