The Risk-Return Tradeoff: A Six-Step Guide to Ending the Curse of Risk Appetite

26 Pages Posted: 21 May 2018 Last revised: 4 Dec 2019

See all articles by Alf Alviniussen

Alf Alviniussen

Independent

Håkan Jankensgård

Lund University - Department of Business Administration; Knut Wicksell Centre for Financial Studies

Date Written: May 7, 2018

Abstract

Risk appetite has become a byword for bringing peoples’ attention to the question of how much risk the organization is prepared to accept. While we agree that more attention on risk is often desirable, the current usage of the concept is highly inconsistent and may only serve to make firms more bureaucratic, over-governed, and reliant on simplistic decision-rules when making decisions involving risk. In this article we discuss six steps aimed at helping firms avoid the curse of risk appetite. We also show how the proposed steps can be implemented in practice. The purpose is to align decision support tools and organizational processes in firms to facilitate trading off risk and opportunity in an efficient way.

Keywords: Enterprise risk management, strategic risk-taking, risk budgeting, risk appetite, risk capacity

JEL Classification: G30, G32

Suggested Citation

Alviniussen, Alf and Jankensgård, Håkan, The Risk-Return Tradeoff: A Six-Step Guide to Ending the Curse of Risk Appetite (May 7, 2018). Available at SSRN: https://ssrn.com/abstract=3174591 or http://dx.doi.org/10.2139/ssrn.3174591

Alf Alviniussen

Independent ( email )

Håkan Jankensgård (Contact Author)

Lund University - Department of Business Administration ( email )

Box 117
SE-221 00 Lund, S-220 07
Sweden

Knut Wicksell Centre for Financial Studies ( email )

Box 7080
Lund, SE-220 07
Sweden

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