Risk Appetite vs. Risk Tolerance: Decoding the Differences

When it comes to risk management, even seasoned veterans can mix up terminology—there are a myriad of terms that are meaning-adjacent. A prime example is the misuse of “risk appetite” and “risk tolerance” as interchangeable terms, or even misapplying them entirely. However, It’s only when these two terms are well understood that security teams can balance taking risks and controlling risks to achieve business objectives. 

In this blog, we look at how the best cybersecurity standards, like ISO and NIST, define risk appetite and risk tolerance, guidelines on these concepts, examples, and best practices to help you apply them effectively.

TL;DR

Risk appetite and tolerance are similar in that both guide decision-making by setting boundaries for acceptable risk, but they differ in scope and detail: appetite focuses on strategic goals and broader limits, while tolerance zeroes in on operational specifics and immediate limits.

While risk appetite is integrated with overall strategic goals and owned by top executives, influencing major business decisions, risk tolerance is operationalized at departmental levels.

Once finalized at an organizational level, both risk appetite and tolerance are clearly communicated throughout the organization, ensuring all members understand the acceptable risks within their roles

What is risk appetite?

Risk appetite defines the amount of risk an organization is willing to accept in pursuit of a business objective or a decision. This means that as long as the risks associated with the objectives are within the appetite, the organization can keep pursuing the objective. 

On an organizational level, risk appetite shapes a risk attitude that compliments decision-making and strategy planning, allowing decision-makers to place the right bets that maximize benefits for the company while keeping risks at bay.

 For example, a high-risk appetite for venture capital firms would be a willingness to invest in innovative startups with unproven models. 

What is risk tolerance?

Risk tolerance is the number of failures or incidents an organization can take and keep going. This defines how much risk can be tolerated beyond the threshold of appetite. 

While risk appetite guides the strategy and decision-making, risk tolerance levels establish certain operational limits and controls that ensure that business initiatives do not bring in more operational or financial risks than the capacity that an organization can absorb in terms of potential losses.

For example, the same tech startup might tolerate a certain amount of financial loss from new projects each quarter yet plan to cap the loss to prevent it from jeopardizing overall financial health.  

Risk appetite vs Risk tolerance: What are the nuances?

While risk appetite and tolerance might share a purpose—to help organizations operate to ensure growth and business continuity, they are different in terms of how they are measured, ownership, and how they impact day-to-day business operations. 

Here is a detailed comparison between different aspects of risk appetite and tolerance:

Aspect	Risk appetite	Risk Tolerance
Integration with the overall strategy	Risk appetite is largely tied to an organization’s strategic initiatives and business goals, which further dictates acceptable limits of risk for each activity and guides tolerances of objectives like growth or sustenance.	Risk tolerance is closely tied to day-to-day operations, setting hard boundaries in quantitative terms to ensure the consequences of each decision are contained within the capacity of the business unit to absorb in case of a fallout.
Impact on risk ownership and accountability	Risk appetite is almost always owned by the top level executives like CEO, or  CFO. Executive allies like CISOs, CIOs, and CXOs work with risk owners to help CFO and CEOs guide their appetite.	While tolerance is also top-down, it is operationalized at departmental levels with specific limits that trickle down to individual risks, ensuring daily activities align with the overall risk strategy.
Relationship with risk assessment and decision-making	Provides a strategic framework for risk-taking, influencing major decisions like capital allocation and market entries.	Serves as operational criteria for real-time decision-making, with specific thresholds for when to escalate or respond to risks.

Risk tolerance and appetite are both measured using certain levels as described below:

Measurement term	Risk Appetite	Risk Tolerance
High/aggressive	High—As evident from the name, organizations with a high-risk appetite prioritize growth and explore uncertain ventures even if they involve substantial operational risks.	Aggressive—Aggressive tolerance means that organizations have a high capacity to endure fallouts or negative impacts, which enables them to win in the long term while withstanding short-term fluctuations.
Medium or Moderate	An organization might have a medium risk appetite if it only accepts types of risks with reasonable rewards without excessive risk exposure.	Moderate tolerance means that an organization will not be able to sustain large deviations or fluctuations from its risk appetite in the short term.
Low or Conservative	A low risk appetite means that the organization is risk-averse, and heavily prioritizes continuity over. growth.	A conservative approach to risk tolerances means that an organization has a very low threshold to sustain negative outcomes.

Examples of how risk appetite and risk tolerance differ from each other

Industry	Example of Risk Appetite	Example of risk tolerance	Analyzing the difference
Healthcare	“Patient safety is our top priority. We can not afford situations that risk the physical or mental well-being of patients.”	15 minutes is the maximum time we can leave a patient unattended in an emergency, however, in rare circumstances, to prioritize other life-saving endeavors, patients with non-life-threatening situations may be left unattended for up to 4 hours.	Difference: While risk tolerance specifies the capacity and deviations accepted on the operational level of risk, risk appetite lays broader frameworks and guiding principles.
Financial services	“As an organization, we can invest in high-growth initiatives as long as they don’t succeed X amount in losses.”	“We have successfully placed measures to absorb the potential X amount in loss from an activity. However, in rare cases, our measures can work to cover x+y amount in losses at maximum.”	Difference: This scenario showcases a high-risk appetite for potentially high returns, balanced by qualitative deviations defined in risk tolerance that quantitatively caps exposure to any single investment, thus managing the operational risk.

Similarities between risk appetite and tolerances

Risk appetite and tolerance both share a goal—to help inform an organization’s risk management policies. Here are some nuanced points to consider:

• Risk management framework: Both risk appetite and tolerance help decision-makers identify and assess threats by setting operational limits for effective risk management.  
• Both concepts should align with the organization’s strategic objectives. While risk appetite sets broad parameters, risk tolerance defines the operational limits within those parameters, working in tandem. 

• Shapes the culture of security: Risk appetite and tolerance build and inform an organization’s risk culture. They do so by outlining norms and attitudes towards risk-taking and enabling everyone to understand the perimeter.
• Responsive: Both concepts are not static; they evolve with the organization’s external and internal environments. Fluctuations in market conditions, organizational goals, and risk perceptions guide adjustments in risk appetite and tolerance limits.
• Communicated across the organization: Once finalized in the boardroom, risk appetite and tolerance are usually communicated clearly across all levels of the organization. This ensures that everyone understands the risks they can take in their roles, promoting consistency in risk-taking behaviors.

Prioritize and manage risks better with Sprinto

Leverage Sprinto’s Sprinto industry-benchmarked risk register to build your own that’s relevant to your business. Swiftly adjust priority based on tolerances and appetite of your organization as Sprinto enhances your ability to interpret and assess risks with precision by deeply integrating with your cloud infrastructure. It continuously monitors controls to automatically detect misconfigurations, anomalies, and critical vulnerabilities, enabling you to manage risk levels accurately without overestimating or underestimating threats. 

FAQ

How are risk appetite and tolerance used in decision-making?

Organizations use risk appetite framework and tolerance methodology to make informed decisions about resource allocation, strategic planning, and risk assessment. By understanding the boundaries set by risk appetite and tolerance, managers and executives can make choices that align with the organization’s overall risk management framework and strategic goals.

How should an organization set its risk appetite and tolerance?

Setting risk appetite and tolerance involves understanding the organization’s strategic objectives, the risks that could impact those objectives, and the level of risk the organization is willing to accept. It typically requires input from senior management and the board and should be communicated clearly throughout the organization.

How often should risk appetite and tolerance be reviewed?

Risk appetite and tolerance should be reviewed regularly, typically annually, or when there are significant changes to the business environment, operational structure, or strategic objectives. This ensures that they remain relevant and effective in managing risk under changing conditions.

What’s a risk appetite statement?

A risk appetite is a formal record that states what risks are acceptable for organizations. This statement is usually made by an organization’s leadership, typically directors, c-suites, and security heads. This statement serves as a guide for strategic decision-making and risk management. 

Do risk tolerances apply to individual risks?

Yes, risk tolerance applies to individual risks, with each specific risk having its own set of tolerances based on its potential impact on the organization’s operations, financial performance, strategic objectives, and compliance requirements. These tolerances help manage and mitigate risks at a granular level, ensuring that each risk is kept within acceptable boundaries to support overall organizational resilience and strategic goals.