Changing Risk Tolerance

One of the reasons that many firms have not yet set a risk tolerance seems to be that management is afraid that the Risk Tolerance will then take over the company and they will no longer be able to make major decisions because of the risk tolerance.

I imagine the picture of a large sumo wrestler with the name “risk tolerance” sitting in the  corner of the executive conference room.  It would be really smart to avoid making risk tolerance unhappy.

But that is not really the case.  Risk Tolerance is not going to sit on you if you make the wrong decision.  Risk Tolerance is not going to actively insist that you make a decision that you know is wrong.

Risk Tolerance is more like the little brother that tags along behind you.  You know that if you do anything little brother will tell Mom.

Risk Tolerance is a commitment to acting as your own little brother.  Telling on yourself if you take on risk that goes beyond a certain pre-agreed upon point.

Then it is up to you to convince the higher authority that your risk taking was appropriate for whatever reason that you have.

In addition, Risk Tolerance should not be carved in stone.  Risk Tolerance should be written on the white board in Erasable marker.  You should not expect to clean that board every week.  But the option will always be there to walk up to the board and wipe it clean.

That does not mean that every time that it is inconvenient that the Risk Tolerance should be changed.  But it does mean that as the world changes, you should be sure that you Risk Tolerance still means what you intended it to mean when it was set.

Otherwise, you are in danger of having it turn into a Sumo Wrestler in the corner.

Explore posts in the same categories: Risk Appetite, Risk Limits, Risk Management System


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One Comment on “Changing Risk Tolerance”

  1. mode20100 Says:

    A+ would read again

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