What defines risk tolerance?

Risk tolerance is defined as what the Board of Directors has prudently authorized the organization to accept, reflecting the strategic approach to risk management within an organization. This definition emphasizes that risk tolerance is not merely about the inherent desire or willingness to take risks, nor is it solely related to maximum risk thresholds set by the company. Instead, it represents a formalized decision-making process that incorporates the views of senior management and the board, ensuring that any acceptance of risk aligns with the organization's objectives, culture, and stakeholder expectations.

The focus on authorization by the Board highlights the governance aspect of risk management, where decision-makers assess and agree on the level of risk the organization can undertake to achieve its goals without unreasonable jeopardy. This sanctioned tolerance provides a framework that guides operational decisions, risk assessments, and the overall risk management strategy, facilitating a managed approach towards uncertainties.

In this context, other definitions may not capture the complete essence of risk tolerance. The desire to take risks can reflect an individual's personal inclination rather than an organizational stance. Maximum risk limits may only express an endpoint rather than the comprehensive governance-led process that dictates risk acceptance. Similarly, gauging past risk experiences provides insights but does not define the organization's current capacity for risk taking or the governance structure surrounding its