Suppose you arrive at your dentist’s office for an appointment. Before escorting you to an examination room, the receptionist asks what your pain appetite is.
That afternoon, you head over to the Apple store to buy the latest iPhone. A sales clerk at the front door points you to the line stretching around the block and asks what your wait-time appetite is.
That evening, you attend your firm’s board meeting and the first question on the agenda is what your risk appetite is.
Have you had enough already?
As I hope my examples make clear, the notion of risk appetite is bizarre. No one should have an appetite for risk any more than they should have an appetite for pain or waiting in line.
But many people use the term “risk appetite”. Maybe you do too. I encourage risk managers not to.
There is a perfectly good alternative. A “risk limit” is a “risk appetite”. Both terms mean the same thing.
But their connotations are completely different.
“Risk limit” implies that risk is undesirable. We may take risk as a means to achieve a goal—as a necessary evil. But we actively limit the risk.
“Risk appetite” suggests that risk is desirable—something we should have an appetite for, like food or intimacy.
A prudent person limits risk. A thrill seeker has an appetite for risk.
As a risk manager, you are a role model. With your words and actions you set a tone for risk taking within your organization. Your reputation is shaped by the tone you set.
So which tone do you want to set: one of prudence or one of thrill seeking?
The next time someone asks you what your risk appetite is, tell them you have none.
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