What is Risk Attitude of Stakeholders?

April 4, 2018
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Stakeholder(s) is a collective term that includes customers, users, and sponsors, who frequently interface with the Product Owner, Scrum Master, and Scrum Team to provide them with inputs and facilitate creation of the project’s product, service, or other result. Stakeholder(s) influence the project throughout the project’s development. Thus it is important to understand the risk attitude of the stakeholders. Essentially, the risk attitude of the stakeholders determines how much risk the stakeholders consider acceptable and hence when they will decide to take actions to mitigate potential adverse impacts of risks. Therefore, it is important to understand the tolerance levels of the stakeholders in relation to various factors including cost, quality, scope, and schedule.

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Risk attitude is influenced by the following three factors:

  1. Risk appetite: refers to how much uncertainty the stakeholder or organization is willing to take on.
  2. Risk tolerance: indicates the degree, amount, or volume of risk stakeholders will withstand.
  3. Risk threshold: refers to the level at which a risk is acceptable to the stakeholder organization. A risk will fall above or below the risk threshold. If it is below, then the stakeholder or organization is more likely to accept the risk.

Utility Function is a model used for measuring stakeholder risk preference or attitude toward risk. It defines the stakeholders’ level or willingness to accept risk. The three categories of Utility Function are the following:

  1. Risk averse: Stakeholder is unwilling to accept a risk no matter what the anticipated benefit or opportunity.
  2. Risk neutral: Stakeholder is neither risk averse nor risk seeking and any given decision is not affected by the level of uncertainty of the outcomes. When two possible scenarios carry the same level of benefit, the risk neutral stakeholder will not be concerned if one scenario is riskier than the other.
  3. Risk seeking: Stakeholder is willing to accept risk even if it delivers a marginal increase in return or benefit to the project.

The assessment of risk helps in understanding the potential impact of a risk. The overall effect on business value should be estimated; if that impact is significant enough to outweigh the business justification, a decision must be made whether to continue the project.

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