TOLERANCE

OF
RISK
 Risk is the potential that a chosen action or
activity (including the choice of inaction) will
lead to a loss (an undesirable outcome).
The notion implies that a choice having an
influence on the outcome exists (or existed).
Potential losses themselves may also be called
"risks".
Almost any human endeavour carries some risk,
but some are much more risky then others.
 There are different definitions of risk for each
of several applications.
The widely inconsistent and ambiguous use of
the word is one of several current criticisms of
the methods to manage risk.
In one definition, "risks" are simply future
issues that can be avoided or mitigated, rather
than present problems that must be
immediately addressed.
 The risk is then assessed as a function
of three variables:
The probability that there is a threat
The probability that there are any
vulnerabilities
The potential impact to the business.
 What Does Risk Tolerance Mean?

The degree of uncertainty that an investor can

handle in regard to a negative change in the
value of his or her portfolio.
 Risk tolerance in personal finance is of course the
degree of willingness to accept risk of loss in an
investment portfolio (in anticipation of correspondingly
higher degrees of return).
An individual will fill out one of those questionnaires
to acquire a rating, such as low, medium or high, and
then select investments, perhaps on the basis of the
measure of historical volatility (beta risk).
In corporate finance, the firm might publicize a
statement indicating a general stance or attitude
regarding the degree of risk it will usually take on.
A required rate of return, set by policy, is a risk-
adjusted percentage return on capital, used as a
guideline to evaluate project proposals. It therefore
indicates a degree of risk tolerance.
 Over the past few years in a volatile market,
consumers wavering confidence and tight credit
conditions many small business owners are rethinking
their tolerance for risk. In more favorable conditions,
you find a high tolerance for risk in investment
strategies versus the current conditions which create
fear and panic resulting in a lower tolerance.
Unfortunately, many small business owners react to
their rears and are making bad decisions in these slow
economic times. The goal is to weather the storm by
being strategic and creating a plan that diversifies your
risk but still allows you to invest in your business
 Take your emotional temperature.
There are a number of factors that can go into your decision
and emotion is one of them. Each of us has a multitude of
risk tolerances that vary with specific events in our life. In
bad times, we have a tendency to try to limit our losses and
our rational brains go into overdrive you begin to see
decisions to pull back on marketing or perhaps not to invest
in that technology this year.
This could be very damaging to you. Be sure to take your
emotional temperature and use more facts than fiction to
make r decisions in your business. Create an investment
criterion to evaluate potential investment opportunities and
leave the emotion at the door.
 Think like a maverick.
Warren Buffet once said Amid adversity, there is
opportunity. Find ways to stand apart from the pact
and use risk to propel your business. For example,
when others are pulling back on investing in their
marketing, you should be looking for ways to do more
marketing.
When others are letting go staff and putting a strain on
delivering a quality product, invest in a team that will
deliver exceptional service. Although investing in a
declining market can be difficult, it has been proven to
add more benefit to support long term objectives.
 Invest for long term over short term.
Markets have been changing for hundreds of years. It is how we
respond to those changes that impact our business. In declining
markets, focus your investment strategies on items that will yield
long term results and meet help you meet your overall objectives. In
the face of adversity, we have a tendency to want to fix things right
now and look for ways to achieve short term wins. Be strategic and
invest in opportunities that will yield you longer term
benefits: Technology, marketing, sales positioning etc
As business owners we all know how unstable market conditions
can transform a calm, cool and collected business owner into an
emotional and scattered one. By having a plan and criterion that
you can refer to and plan to might be the difference between
reaching your long term goals .
 If the entrepreneur wants their business to
grow, they need - 2 traits that must be quickly
acquired:
Thick Skin
Risk Tolerance
 Thick Skin
People are sensitive to rejection and human
beings do their best to avoid rejection at all
costs.
Conversely, the entrepreneur must become
completely desensitized to rejection as they
must quickly come to terms with the fact that
they are going to encounter resistance and
judgment from others every step of the way.
 Risk Tolerance
Many entrepreneurs are taught to focus on
controlling numbers and because of this focus,
they don't learn how to tolerate mass amounts of
risk.
Managing a high amount of risk is not easy nor is
it fun, but it is necessary.
Entrepreneurs, until the business is completely
done with its growth phase and can no longer
grow at a fast pace, are going to have to live with
a gut feeling that is indescribable.
 These company growth stages that tend to induce
a large amount of stress include the transition to
an office, the hiring of multiple highly paid
employees who are crucial to the success of the
business and also training these individuals as the
entrepreneur must learn that they cannot control
everything.
The ability to step back and "let go" cannot be
taught anywhere. It is a feeling that can make the
entrepreneur dizzy.
 Example
Imagine an IT firm that is doing well and sees
potential in branching out into a new area of
cyber security. Managers do not have clear
agreement on the criteria for success, and
guidelines for making incremental choices, as
they build the new operation. The firms
tolerance for risk (or risk appetite) for this
specific venture needs definition beyond a
simple percentage.
 Example shows that Enterprise Risk
Management cannot rely solely on the notion
of risk tolerance as a discrete number, a
percentage of capital at risk.
 Risk capacity: the amount and type of risk an enterprenuer
is able to support in pursuit of its business objectives.
Risk appetite: the amount and type of risk an enterprenuer
is willing to accept in pursuit of its business objectives.
Risk tolerance: the specificmaximum risk that an
enterprenuer is willing to take regarding each relevant risk.
Risk target: the optimal level of risk that an enterprenuer
wants to take in pursuit of a speci_ c business goal.
Risk limit: thresholds to monitor that actual risk exposure
does not deviate too much from the risk target and stays
within an enterprenuers risk tolerance/risk appetite.
Exceeding risk limits will typically act as a trigger for
management action.
 What propels enterpreneurs towards
self employment?
There are four factors
Negative displacement,
Being between things,
Positive push,
Positive pull
 Negative displacement

Negative displacement is the alienation of

individuals or groups of individuals from the
core of society.
These individuals may be seen as not fitting in
to the main flow of social or economic life.
EXAMPLE immigrant status,fired from
job,angered or bored by current employment
 Being between things

People who are between things are also more

likely to seek enterpreneurial outlets than
those in the middle things.
Example Between army life & civilian life,
Student life & career.
 Positive pull

Positive influences also lead to the decision to

investigate enterpreneurship & these are called positive
pull influences.
They can come from potential partner , a mentor, a
parent , an investor , or a customer.
The potential partner encourages the individuals with
the offer of sharing the experience,helping with the
work ,& spreading the risk.
The mentor raises self esteem & confidence.
Mentors & partners can also introduce the enterpreneur
to people inside the social &economic network for new
venture activity.
 Positive push
Positive push factors include career path that
offers enterpreneurial opportunities or an
education that gives the individuals the
appropriate knowledge & opportunity.
There care two types of career paths
Industry path
Sentry path
 Industry path

A person prepares himself for a job or career in

a particular industry & learns everything there
is no know about that industry.
Because all industries displays some sort of
dynamics or change ,over time ,entrepreneurial
opportunities that exploit that change come &
go.
 Sentry path

The sentry path emphasizes the money & the

deal. People in this case see many different
opportunities in many different industries.
They tend to be lawyers, accontant,consultant
&broker.
These people learn hoe to make deals & find
money.
They have contacts that enables them to raise
money quickly when right opportunity comes
along.