Using risk appetite and risk attitude to support appropriate risk-taking: a new taxonomy and model
Main Article Content
Abstract
The term ‘risk appetite’ is used widely and increasingly, but there is no commonly accepted definition for it. This situation is exacerbated by confusion between risk appetite and other risk-related terms, especially risk attitude.
This paper offers a consistent and coherent taxonomy of these terms, showing how they relate to one another. This allows development of a rich model to explain the complementary and central roles of both risk appetite and risk attitude when individuals or organisations decide how much risk can be taken in a risky and important situation.
By progressively deconstructing the full model, we conclude that the key step is to set risk thresholds. We derive a three-stage approach to setting risk thresholds that ensures that the outcomes properly reflect organisational risk culture and the individual risk propensities of key stakeholders, and also clarifies the essential role of risk attitude as a control point. This enables individuals and organisations to choose the appropriate risk attitude in order to influence the amount of risk that is taken in any given situation, so that the achievement of objectives is optimised.
Article Details
Authors who publish with this journal agree to the following terms:
a) Authors retain copyright and grant the journal right of first publication with the work simultaneously licensed under a Creative Commons Attribution License that allows others to share and adapt the work with an acknowledgement of the work's authorship and initial publication in this journal.
b) Authors are able to enter into separate, additional contractual arrangements for the non-exclusive distribution of the journal's published version of the work (e.g., post it to an institutional repository or publish it in a book), with an acknowledgement of its initial publication in this journal.
c) Authors are permitted and encouraged to post their work online (e.g., in institutional repositories or on their website) prior to and during the submission process, as it can lead to productive exchanges, as well as earlier and greater citation of published work (See The Effect of Open Access).
d) Authors should be aware that the Creative Commons Attribution (CC-BY) License permits readers to share (copy and redistribute the work in any medium or format) and adapt (remix, transform, and build upon the work) for any purpose, even commercially, provided they also give appropriate credit to the work, provide a link to the license, and indicate if changes were made. They may do these things in any reasonable manner, but not in any way that suggests you or your publisher endorses their use.