![]() ![]() In one study, conducted by researchers who evaluated under what conditions senior executives use data analysis for decision-making versus intuition or “gut”. To be sure there is research and evidence that educated guesses can outperform data analytics but what is the context for the right situation? Should the Fed raise rates or cut rates? Will recession start? Will inflation accelerate or slow down? Will the company meet its sales and revenue goals? Will new products achieve that scale that is needed to grow profit margins? Many, if not most, of these challenging questions are often answered based on our expectations of the future. Markets were disappointed that the Fed did not deliver certainty in their guidance for future interest rate hikes nor whether interest rates would be cut. The recent Federal Reserve practice of exercising its mandate to adjust interest rates to lower inflation and maintain economic growth is fraught with volatility as market pundits and prognosticators attempt to predict the future direction of prices in a variety of securities based on their own expectations of what the Federal Reserve should do. Magical thinking is when the markets believe that what they want (no more rate hikes) will be achieved by complaining about the Fed’s decision-making process when they don’t get what they want. ![]() The problems arise when our expectations are not met, and we begin to assign blame to others as the cause of our collective disappointments. In fact, we talk about the mood of the markets as if collective markets have a personality! Stock prices ebb and flow based on expectations of market value that change regularly. Financial markets have been an ideal laboratory of these experiments since gambling markets were created. The disconnect feels real and visceral but we fail to remember that the value or worth that we set is arbitrary and may not be based on a realistic basis of value. reality can often lead to feelings of discontentment and unhappiness. While we hope these two will match up, they often don't. In other words, we set an arbitrary value or worth on a good, service, or actively based on amount of happiness it produces.īut what happens when are expectations are not met? Expectations are what we think will happen, while reality is what actually transpires. Expectations are implied in the definition of utility, meaning that we humans pursue those things that bring us satisfaction or benefit therefore we expect to achieve greater utility by doing what we desire. Economic theories based on rational choice usually assume that consumers will strive to maximize their utility. More specifically, utility is the total satisfaction or benefit derived from consuming a good or service. Utility is a term used to determine the worth or value of a good or service. Therein lies the problem!Įconomists attempted, unsuccessfully, to define the process of risk management in pursuit of one’s means and ends as utility. In other words, risk is in the eye of the holder, who determines the impact of a risk either emotionally or quantitatively. ![]() All of us have developed life experiences and many of us believe that our life experience is the norm when in fact while we do have shared experiences the outcomes and results of these shared experiences are not the same. The reality is we live in an abstract world that we all are attempting to make sense of, but we use very different tools to anticipate or predict risk. Primarily, it is because each of us experience risk differently, in different contextual situations, and the impact of a risk for the average person and the richest person in the world is miles apart. How can a four-letter word be so complex and require so many different definitions? Risk is such an abstract concept that a simple Google search of “definitions of risk” will present more pages of risk definitions than you can imagine. Insurance companies help to partially offset some financial risks at a cost. Insurance is a tool to transfer some risks to a company in the event of an adverse outcome. As a risk professional, very few people want to talk about risk at cocktail parties and when they do, most people think you mean insurance. ![]()
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