Risk tolerances

Abstract

Risk tolerance is an amount of risk that a project driven organization can withstand. This element in project management indicates the willingness of organization and it's people to avoid or accept risks.

The levels and perspectives of risk tolerance are dynamic throughout the life of the project. Risk tolerance has three different perspectives when you are involved in a project: company, project manager, and stakeholder. The company risk tolerance depends on the financial stability and project diversification. A project manager’s risk tolerance is affected by job security and corporate culture. The stakeholder’s risk tolerance is influenced by project objective. The project success depends on agreeable level of risk tolerance and early risk management planning.

Big idea

The section defines what risk tolerance is.

Application

This section talks about application of risk tolerance.

Modeling and quantification of risk tolerance

OGC offers a risk profile generator on its website (www. ogc.gov.uk) that uses project risk register information to generate such a profile. The process begins with the firm determining how much of a negative impact it is willing to risk enduring given a probability. With this information, the risk tolerance line is mapped out. Each risk is plotted according to its perceived likelihood of occurring, as well as the impact it would have should a worst-case scenario happen. With this information charted out, the firm can identify the individual risks that lie above the firm’s tolerance level and focus resources towards those. The utility curve is another straightforward tool for understanding risk tolerance. A concave utility curve shown in Fig. 2 demonstrates a risk-averse decision-maker while Fig. 3 shows a risk-taker. Theoretical tools such as this one can provide some assistance for managers as they define how much risk is acceptable in their project and make decisions accordingly.

Influence of risk tolerance

The section talks the importance of risk tolerance.

Company perspective

Overview of risk tolerance from the company perspective.

Project manager perspective

Overview of risk tolerance from the PM perspective.

Stakeholder perspective

Overview of risk tolerance from the stakeholder perspective.

Limitation

The section discusses limitations of the method.

References

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