Risk Tolerance Confusion

With the recent AspenTech case, the class had some confusion on the definition of risk tolerance. I know I was one of those class members who had the trouble. So I decided to research this subject more.

http://www.investopedia.com/terms/r/risktolerance.asp
According a definition I found on investopedia, risk tolerance is the degree of uncertainty that an investor can handle in regard to a negative change in the value of his or her portfolio. An investor's risk tolerance varies according to factors such as age, income requirements, and financial goals. For example, a 70-year-old retired widow will generally have a lower risk tolerance than a single 30-year-old executive, who generally has a longer time frame to make up for any losses she may incur on her portfolio. Risk tolerance is how tolerant you are of risk. If you are tolerant of risk you can afford to take more risk. For example, if the Beta of your company is low, you can take on more risk if you want to. You don't have to, however.

When you are risk tolerant, you can pursue more risk for higher returns. A risk tolerant investor will pursue higher potential reward investments even when there is a greater potential for a loss. A risk tolerant individual might not sell his stocks in a temporary market correction, while a risk averse person might panic and sell at the wrong time.
http://www.investopedia.com/articles/financial-theory/08/three-risk-types.asp

However, just because you can take risk does not mean that you should. For instance, gambling could potentially lose all your money. You have the money to lose, but do you really want to lose it? The measure of risk tolerance for judging an investment is not enough. When taking on investments 2 questions to ask are Question 1: How much risk can you handle psychologically? and Question 2: How much risk should you take on? These are 2 completely different questions as I hinted at before. Question 1discusses risk tolerance, and question 2 potentially deals with asset allocation in your portfolio. A blend of three factors should be considered when creating a long-term investment strategy: risk tolerance, the financial capacity for risk and the optimal risk. You should combine these risks and make your risk tolerance match an efficient financial portfolio as well. Higher risks provide higher returns. If you are after higher returns, you must take on higher risks. But, not everyone has the ability or capacity to take on such risks. This is your risk tolerance. The higher returns, the more risk, and the more capital you would need to invest and could lose. Be careful to assess your risk tolerance before making investments. However, do not just use risk tolerance as your one measure. Assess risk in other measurements such as VaR and other risk measures.