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.

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