Risk and uncertainty

Rethinking risk appetite

In previous blog posts I’ve expressed my reservation about the idea of “risk appetite”. This personal concern is rooted in the idea that it seems a somewhat esoteric concept, especially considering that managing uncertainty is such an important part of our working lives. But my specific concerns have been around the dangers of “risk appetite statements” being too specific to capture complexities of real situations, or too numerous that they can be misleading. (In that last post, “too numerous” is anything greater than one.)

So I was happy to read what Norman Marks had to say when considering a survey of risk management in the financial sector [pdf]. His article entitled “Do risk appetites add value?” is a nice example of Betteridge’s law of headlines (“Any headline that ends in a question mark can be answered by the word no“). He offers an example of a risk appetite statement which is clear and specific, but not actually useful for individuals day to day because adherence to it can only be assessed when aggregating the finances of the whole organisation, which any individual working in part of the organisation cannot do.

Rather than trying to “fix” risk appetite he chooses to take a step back, and suggests an organisations ask itself six questions:

  • What decisions have to be made for success?
  • What could go wrong and what needs to go right?
  • What information do decision-makers need?
  • Who needs to make the decisions and who needs to be involved?
  • How I can guide decision-makers to take the right level of the right risks?
  • How do I monitor performance to know when poor decisions are made?

If we can ask and answer those questions then, he suggests, we are doing well… regardless of whether our solution includes anything called a “risk appetite”.

As with so many other things, when they don’t obviously sit right with us it’s useful to take a step back and ask ourselves, “Why? What are we trying to achieve?” Then we have a better chance of success, even if the solution isn’t quite what we expected.

Photo by Jon S

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