First, individual managers will be surprised, as their unmet expectations wear away their convictions about how the world works. This process of changing risk attitudes typically takes two routes. Pragmatists are puzzled and surprised by the success of the orderly bean-counting Managers as well. The Maximizers will be surprised that they underperform their expectations, while Conservators see the careful risk-taking of the Managers succeeding. In moderate market, there is a discoverable order.Pragmatists see their own larger-than-expected gains and are surprised. Managers and Conservators see the large gains of the Maximizers and are surprised that they can get away with that. In a boom, the reverse happens - the world is a huge positive-sum game.The Pragmatists are surprised when “correlations all go to one” and their preferred strategy of diversification fails to protect them. The Maximizers thought that persistent losses would not happen and Managers are surprised by the magnitude of the losses. Of course, Maximizers and Managers are surprised. In a bust, there is a discoverable order: the world is a vast negative-sum game.Each had formed their own idea of what they were predicting and they all end up disappointed. Maximizers, Conservators and Managers are all surprised by the lack of predictability of the uncertain market. This is the world of financial uncertainty, when business activity and markets might turn abruptly. In the uncertain market, there is no discoverable pattern to the responses.To understand the surprises in the other 12 boxes, we contrast the strategy that seems sensible to each firm, with the responses the resulting tactics will provoke in each of the actual worlds. This means that surprises, when they come, can come in 12 different ways, as shown in the chart below (click to see a larger version).Īlong the diagonal of the matrix (see chart) the world is indeed the way it is expected to be - there are no surprises. And business strategies are chosen because of an expectation of a market in one or the other of those states. Individual managers might expect a moderate market with fluctuations that follow past experiences an uncertain market with unpredictable volatility a market boom when everything seems to be going up or a recession when everything seems to be going down. Surprise is the persistent, and very likely growing, mismatch between what we expect to happen and what actually happens in the real world.īecause firms and individual managers have totally different risk attitudes, there is a varied and varying set of surprises that are happening all the time. Over time, these risk attitudes change via the process of surprise. Opinions can be classified into four risk attitudes: Pragmatists, who believe that the world is uncertain and unpredictable Conservators, whose world belief is of peril and high risk Maximizers, who see the world as low-risk and fundamentally self-correcting and Managers, whose world is moderately risky, but not too risky for firms that are guided properly.
In the best of times or the worst of times - or even in unusually uncertain times - the prevailing opinion about how risky it is to do business is never unanimous.
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