Risk Tolerance

Risk Tolerance

Risk Tolerance Jonathan Poland

A risk is the possibility of an adverse event occurring, while a trigger is the root cause of that event. For example, if a company identifies a risk that bad weather could cause the business to close, the approach of a hurricane could be the trigger that causes that risk to materialize. Sometimes, risk triggers can be identified in advance as part of risk management efforts, but in other cases, the specific triggers for a risk may be unknown beforehand. For instance, an organization may be aware of the risk of damage to its reputation, but may not be able to predict exactly what could cause that risk to occur, such as a customer posting a viral video showing poor customer service.

Risk tolerance refers to the level of uncertainty or potential loss that an individual or organization is willing to accept. Risk management aims to maximize the potential reward for a given level of risk tolerance, rather than always trying to minimize risk. This is because taking calculated risks is often necessary in order to achieve business or personal goals.

High Risk Investor

A high risk investor who is willing to tolerate potential losses of up to 50% of their portfolio in order to maximize their potential gains.

Low Risk Investor

A low risk investor who will not tolerate any potential loss of capital is restricted to relatively safe investments such as insured savings accounts that have limited potential returns.

High Risk Startup

A startup company is run by individuals with a high tolerance for risk. Although the business may fail, it also has potential to provide unusually high returns to investors.

Mega Projects

A mega project such as a large bridge may have very low tolerance for risk due to its large budget and responsibility for public safety. Such a project requires intensive risk management processes to ensure that its low risk tolerance is met.

Professional Snowboarder

Most professional snowboarders have a high risk tolerance because it’s difficult to acquire superior snowboarding skills without taking any risks.

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