Guide: Risk Appetite, Tolerance, and Threshold - PMBOK 7th Edition

Risk Appetite, Tolerance, and Threshold: These are key concepts in project risk management, according to the Project Management Body of Knowledge (PMBOK) Guide Seventh Edition.
Why it is important: Understanding these concepts provides a metric to measure, monitor, and control risk levels during the entire project life cycle, leading to better decision making, resource allocation, and higher project success rates.
What it is:

• Risk Appetite: It is the degree of uncertainty an entity is willing to take on, in anticipation of a reward. It influences decision-making processes in risk management.
• Risk Tolerance: It is the degree, amount, or volume of risk that an organization or individual will withstand.
• Risk Threshold: It is the level of impact or likelihood above which a risk becomes unacceptable.

How it works: These concepts guide project teams in identifying, analyzing, and responding to risks. Risk appetite determines how aggressive or conservative the team will be in managing risk. Risk tolerance sets the 'limits' within which the team must operate. Risk threshold triggers specific actions (like escalation) when crossed.
How to answer questions about Risk Appetite, Tolerance, and Threshold in an exam: Identify key words in the question that point towards either risk appetite, tolerance, or threshold. Consider the overall risk culture of the company, project or situation described in the exam question.
Exam Tips: Answering Questions on Risk Appetite, Tolerance, and Threshold:

• Focus on understanding differences between the three terms.
• Practice examples of each term to solidify your understanding.
• If a question involves a decision about whether to take on more risk, it probably deals with risk appetite.
• If a question involves action triggered by a project event, it likely refers to the risk threshold.
• If a question discusses how much loss can be accepted, it is most likely referring to risk tolerance.