Appetite for Risk: Theoretical Framework and Practical Application in a Technology-Based Environment

The research objective was twofold: first, to propose a novel framework for composing an organization's aggregate risk appetite, and second, to demonstrate the application of this framework in a suitable organization. A conceptual framework for defining an organizations' aggregate risk appetite was developed based on relevant organizational theory and research through the lens of knowledge management. The organizational appetite for risk framework was subsequently implemented at the São Paulo State Technological Research Institute (IPT) using the Design Science Research approach. Finally, the implementation was carefully examined in order to encourage future applications and to further refine the appetite for risk framework. The composition and application of the proposed appetite for risk framework optimally identified the aggregated risk appetite for the complete test organization. Moreover, organizational differences between bottom-up tolerance and top-down appetite were revealed. Our main practical contribution is a comprehensive procedure to conduct a risk assessment and achieve an organization-wide aggregate risk appetite through the lens of knowledge management. Unlike past theory and research that takes a strictly top-down approach to risk appetite, our framework integrates dispersed knowledge on risk-taking at various levels of the organization thereby contributing to the underexplored role of bottom management in shaping aggregate risk appetite.