On the Meaning and Use of the Risk Appetite Concept

Abstract

The risk appetite concept has been given considerable attention recently in enterprise risk management contexts. A number of definitions exist, most with a link to risk acceptability, but also values and goals. The usefulness of the concept is, however, disputed; some authors argue that we can in fact do better without it. In this article, we provide a thorough discussion of what the risk appetite concept is actually trying to express and how it best can be used in the relevant decision making. The main purposes of the article are (i) to argue that the risk appetite concept, suitably interpreted, has a role to play in risk management, (ii) to show that the risk appetite concept is well supported by some types of risk perspectives and not by others, and (iii) to show how the risk appetite concept is linked to other related concepts, such as risk seeking and risk acceptability. The risk perspectives studied range from expected value and probability based definitions of risk to views on risk, that are founded on uncertainties.

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