Surprise always appears to be on the menu for the economy. Inflation during the 1970s and 1980s surprised decision makers first with inflation on the upside and then on the downside. Growth was stronger than expected in the 1980s and 1990s, but the past few years have brought a string of disappointing GDP numbers.
a. Risk represents the price of getting the unexpected. Identify periods over the last 30 years when growth, inflation, interest rates, dollar exchange rates, and profits came in very different from expectations.
b. For each of these periods identify what assumptions in the marketplace gave rise to expectations that would be nullified by the data.
c. In each case identify elements of the marketplace that would explain how they developed those expectations.
d. Based upon your review in questions a, b, and c, how would you rewrite the history of the housing collapse from 2007 to 2010 as a surprise that upset the expectations of market participants, and what elements gave rise to those expectations for housing?
e. Most surprises in the economic/business arena can be viewed as a three-part sequence. Identify another shock in the economic environment that you can use to break down the surprise/assumptions/elements that provide the understanding of a situation where risk is present.