What is risk tolerance and how is it measured?

Risk tolerance is a measure of how much uncertainty a stakeholder or an enterprise is willing to take on in exchange for potential value.

There are three broad ways of describing a company's attitude toward risk in general:

• Risk aversion: When a company is risk-averse, it means that their preference is to not take risks or there is an unwillingness to accept much uncertainty. 
• Neutrality: When a company is risk-neutral, it means that their attitude toward risk allows some level of risk to be acceptable, just as long as when the risk does occur, there is no loss of any kind.
• Risk seeking: When a company is risk-seeking, it means that they are willing to take on more risk as long as a higher potential value will be achieved, perhaps even seeking higher risks for a higher-value return.

As you can imagine, an individual or company may express different risk tolerances at different times of their lives or in different circumstances. 

These types of risk tolerance can often clearly be seen when it comes to making financial investments. However, they can also be applied within normal project environments.

Let's consider the following example: A stakeholder group sponsoring a project is willing to take the risk of implementing a specific change without the change being fully tested because this change has the potential for high financial return in the short term. If they want to pursue this short-term financial gain, they have to accept the risk that it is an untested change that could negatively impact other aspects if problems arise. In this scenario, in order to potentially realize the financial benefits, higher risk tolerance is accepted.