To
Anyone with a decision to make
From
Daniel Okafor-Reyes
Re
Agenda item 2
Date
2026-11-09

Setting a Risk Budget Before You Start

Decide how much you are prepared to lose before the first move, not during. A risk budget turns a feeling into a limit you can keep.

Ask a seasoned vice-president how they approach a new venture and they will rarely start with the upside. They start with a figure: how much can we afford to lose on this and still be fine? That figure is a risk budget. It belongs to the wider practice of risk management, the identification, evaluation and prioritisation of risks followed by efforts to reduce or control their impact.

Why decide in advance

Limits set in the middle of a situation are weak. When you are losing, it is tempting to raise the limit to get back to even; when you are winning, it is tempting to raise it because things are going well. A limit set before you start, while you are calm, is the one you will respect.

How to set one

  1. Start from what you can absorb. Look at money, time or reputation you could lose without harming essentials. That is the ceiling, not the target.
  2. Divide it. Split the budget across attempts, so one bad result does not use it all.
  3. Write down the stop rule. "When this budget is spent, I stop and review." Put it somewhere you will see it.
  4. Separate it from everything else. In money terms, that means a separate pot, not your everyday account.

Sizing each attempt

There is a mathematical literature on how large each commitment should be relative to the whole. The Kelly criterion is a well-known formula for sizing a series of bets with a known edge to maximise long-run growth. You do not need the formula to use its main lesson: when the edge is small or uncertain, each stake should be a small fraction of the total. Betting a large share on one outcome, even a favourable one, makes ruin far more likely. And when the edge is negative, as it is in games of chance, the formula's answer is to bet nothing at all.

Risk budgets beyond money

  • Time. "I will give this side project two months of evenings, then decide."
  • Attention. "I will check this metric once a week, not hourly."
  • Goodwill. "I will ask this colleague for one favour this quarter."

Leisure spending

The same tool applies to entertainment that involves chance. Gamblers sometimes call the money set aside a bankroll. The healthy way to think about it is as the price of an evening's entertainment, fully spent, with anything left over treated as a bonus rather than as a reason to continue.

On gambling. Games of chance are priced so that the operator comes out ahead over time. If you play, fix a loss limit in advance and treat it as the cost of entertainment, not as an investment. If it stops being fun or starts costing more than you planned, in the US you can call 1-800-MY-RESET.

When you hit the limit

Stop, and do the review you promised yourself. What happened? Was the original estimate wrong, or was it just variance? Should the next budget be larger, smaller, or zero? The review is where you learn; skipping it turns the budget into a formality.

The limit is set before the first move and reviewed after the last one, never in between.

Filed 2026-11-09