Michael Thompson often describes the situation where a person or group does not get the experience that they expect as Surprise. I have also heard that called Disappointment.

Probably Surprise is a better term.

What is going on is that people expect one sort of experience and get another.

In a recent published article, Ingram and Thompson describe the expectations of various environments as:

  • Boom Environment – High Drift, Low Volatility
  • Moderate Environment – Moderate Drift, Moderate Volatility
  • Bust Environment – Negative Drift, Low Volatility
  • Uncertain Environment – Unpredictable Drift, Unpredictable Volatility

With those descriptions, Surprise/Disappointment is easier to describe.  If you believe that the environment is in a Boom and the experience you get is moderate drift and volatility, then you will be surprised and probably disappointed.  And similarly, if you expect a Bust environment and you experience high drift, then you will certainly be Surprised, but probably not Disappointed.  Unless you were really counting on complaining and  are disappointed about good fortune spoiling that.

Surprise is very different for those expecting an Uncertain environment.  For them, it is surprising that they are able to notice any pattern, whether it be high, low or moderate drift and volatility.  They are expecting unpredictable results, a high volatility as well as a high volatility of volatility.  For them, a surprise would be if the experiences did have a reliable volatility.

The Surprise that many of us have been experiencing started out as a Disappointment.  We thought that home prices had a large positive drift and low volatility.  So as many of us started to count upon that expectation, the system reached its carrying capacity for home real estate.  Which is hard to imagine, since with the loans that were over 100% of value, people were being paid by the financial sector to take new homes.

Suddenly, house prices stopped rising.  Most stories about the financial crisis do not even try to give any explanation for that happening.  But it is easy to picture that everyone who was willing to move had already done so recently.  Even in a pay to take, there is a high personal time cost to move.  So the hot market encouraged anyone who might be willing to move and move a year or two or three earlier than they would have otherwise.  But not enough people were willing to do that year after year.  And not enough people were crazy enough to take out mortgages that they had absolutely no chance to pay back.  So the turnover faltered.  Prices simply stopped rising.  And the Surprise hit everyone.

After an extended period of freefall, the market has settled into a much longer period of uncertainty.  No discernable pattern to drift or to volatility.  There is a large and uneven volume of foreclosed real estate in the system.  It comes to market and disrupts prices.  Because the real estate market had relied upon a rather primitive price discovery mechanism, the foreclosures are very disruptive to the pricing of non-foreclosed housing.  This is a major factor in the level of uncertainty of housing and it ripples through the entire financial system and the entire economy.

With this uncertainty, people who are expecting any of the three other patterns of risk are irregularly Surprised, and often Disappointed.  As there are more and more disappointments, more and more people shift their coping strategy to one that makes sense in an Uncertain economy, the strategy of Diversification.  That might sound to be a good thing, but in practice, it ends up meaning avoiding any large or lengthy commitments.  It means a slow down in basic investment and usually a deferral of any of the major investments that would start to fuel the next positive economic cycle.

This Uncertain cycle will end slowly because of the immense amount of extra home real estate that is still in the foreclosure pipeline.

Such cycles usually end when the flip side of the process described above that drove the stoppage in the real estate boom.  What stopped the boom was that people wore out of moving up in housing.  What will stop the Uncertain market will be that people will wear out of not changing houses.  The people who have had one more child will be fed up with the crowding in their smaller house and the people whose kids have moved away will get fed up with maintaining more house than they need.  The people who do well enough to afford a bigger and better house will be fed up with waiting for things to settle down.  And when that happens to enough people, the backlog of existing real estate will finally sell down and a new boom will start again.

And people who had adapted to uncertainty will be Surprised, but not disappointed that their house again finally starts to appreciate.

Explore posts in the same categories: Cultural Theory of Risk, Diversification, Risk, Uncertainty


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One Comment on “Dissappointment”

  1. I feel I should let you know that I stole your picture form this post to use on a post at my own blog. If this is a problem, let me know, and I’ll remove it.

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