Acceptable Risk

Acceptable Risk

Acceptable Risk Jonathan Poland

An acceptable risk is a level of risk that is deemed to be tolerable for an individual, organization, community, or nation. These risks are determined based on their probability and potential impact, and are used as a guide for risk management efforts.

The moment of risk refers to the expected time frame in which an identified risk is likely to occur. Risks often change over time and may be associated with specific events or periods. For example, the risk associated with testing a new rocket may be concentrated at the time of launch. Identifying the moment of risk can help to mitigate or avoid it. For example, if an investor anticipates that a stock may be volatile around its quarterly earnings announcement, they may choose to sell the stock beforehand in order to reduce their risk.

It is generally not possible to completely eliminate all risks, due to factors such as cost and the potential for creating new risks in the process of reducing others. Acceptable risks provide a practical goal for risk management and are often more useful than the ideal of zero risk. The following are illustrative examples of acceptable risk.

Infrastructure

A proposed tsunami shelter is constructed to withstand a 12 meter, or 39 foot, tsunami. Models indicate that a tsunami larger than 12 meters will strike the area once every 1300 years. This risk is published to the community and accepted as part of the project approval process.

Transportation

A jet engine has a historical failure rate of 0.4 per million departures. Regulators and customers generally view this as an acceptable level of risk.

Business

A bicycle manufacturer depends on a single supplier for tires. Without a supply of these tires, production will cease and revenue will decline. The probability of a major supply disruption is forecast to be 0.6% per annum. The management of the company decide to accept this risk.

Individual

A professional skateboarder estimates a 20% chance of a broken bone in a year. They decide this is acceptable given the rewards they find in the sport.

Types of Efficiency Jonathan Poland

Types of Efficiency

Efficiency refers to the relationship between the amount of input used to produce something and the amount of output that…

Substitution Pricing Jonathan Poland

Substitution Pricing

A substitution price is the price at which a customer will choose to switch to a different product or service…

Operational Risk Jonathan Poland

Operational Risk

Operations risk is the risk of financial loss or other negative consequences that may arise from the operation of a…

Preventive Maintenance Jonathan Poland

Preventive Maintenance

Preventive maintenance is a type of maintenance that is designed to prevent failures and extend the lifespan of assets, including…

Early Adopters Jonathan Poland

Early Adopters

Early adopters are individuals who quickly adopt an innovation. Marketing and selling innovative products can be challenging as it may…

Risk Management 101 Jonathan Poland

Risk Management 101

Risk management is the process of identifying, assessing, and mitigating potential risks to an organization’s assets, operations, and reputation. It…

Risk Acceptance Jonathan Poland

Risk Acceptance

Risk acceptance involves consciously deciding to take on a risk, often because the potential reward outweighs the potential negative consequences…

Employee Costs Jonathan Poland

Employee Costs

Employee costs refer to all of the expenses that are incurred when hiring and employing an individual. These costs go…

Business Verbs Jonathan Poland

Business Verbs

Business verbs are action words that are commonly used in business communication to describe goals, plans, and achievements. These verbs…

Learn More

Value Pricing Jonathan Poland

Value Pricing

Value pricing is a pricing strategy in which a company sets its prices based on the perceived value that its…

Operating Agreement Jonathan Poland

Operating Agreement

An LLC operating agreement is a legal document that outlines the rules and procedures for a limited liability company, including…

Bliss Point Jonathan Poland

Bliss Point

The concept of a “bliss point” refers to the amount of consumption of a particular good or service that maximizes…

Customer Acquisition Jonathan Poland

Customer Acquisition

Customer acquisition is the process through which a business attracts and persuades consumers to avail its products or services, thereby…

Compliance Risk Jonathan Poland

Compliance Risk

Compliance risk refers to the risk that an organization may face as a result of not complying with laws, regulations,…

What is Demand? Jonathan Poland

What is Demand?

Demand refers to the quantity of a particular good, asset, or other value that market participants are willing and able…

Capital Jonathan Poland

Capital

Capital is an asset that is expected to produce future economic value. It is a productive resource that is used…

What is Moral Hazard? Jonathan Poland

What is Moral Hazard?

Moral hazard is a term used in economics to describe a situation in which one party has less incentive to…

Customer Convenience Jonathan Poland

Customer Convenience

Customer convenience refers to any aspect of the customer experience that makes it easier and more efficient for them. This…