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
Date Written: May 7, 2018
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: Suggested Citation