How Managers Navigate Complex Economic Environments
Takeaway: Business managers become significantly more uncertain whenever their firms experience rapid change, whether good or bad, and this doubt directly prompts them to scale back hiring and lower prices.
Key Points
Change Breeds Doubt: Managerial uncertainty follows a distinct "V-shape", rising not only when sales drop unexpectedly, but also when they surge unexpectedly.
More Than Statistical Risk: Perceived uncertainty isn't just objective market volatility; it reflects managers entering unfamiliar territory where they struggle to trust incoming information.
Uncertainty Acts Like Pessimism: Holding expected sales growth constant, higher uncertainty leads managers to cut payrolls and trim prices, treating doubt much like bad news.
Why do companies hesitate to hire even when sales are booming? And why do businesses often slow down right after a major corporate transition? We usually think of corporate uncertainty as something triggered by national recessions, banking crises, or global pandemics.
But, for many businesses, their experience can rollercoaster ride. Understanding how corporate leaders navigate these routine bumps helps explain why labor markets can lag even during steady economic recoveries.
Research
The authors set out to answer two fundamental questions:
What creates uncertainty for managers during normal economic times?
How does that uncertainty alter their concrete business plans for hiring and price setting?
To find out, the researchers analyzed a unique quarterly survey of nearly 1,000 German manufacturing firms between 2013 and 2019, a relatively calm period for the broader economy. Instead of guessing what managers were thinking, the survey asked executives directly for their sales growth forecasts along with their "best-case" and "worst-case" scenarios. The gap between a manager's best and worst scenario provided a clear, quantitative gauge of their subjective uncertainty.
Findings
The study reveals that subjective uncertainty is deeply connected to change. When a company’s sales growth strays far from its typical trend, executive uncertainty jumps. This creates a symmetrical V-shaped pattern: rapid contraction causes managerial doubt, but rapid expansion does as well. When executives venture into unfamiliar operational territory, their confidence in future forecasts wavers.
Crucially, the authors show that subjective uncertainty is not identical to objective statistical volatility. Traditional economic models assume managers behave like rational supercomputers, equating uncertainty strictly with the statistical risk of future shocks. Bachmann and his co-authors demonstrate that human managers face a distinct learning curve.
When hit with unusual sales results, managers lose confidence in how to interpret market signals. As a result, subjective uncertainty rises even if underlying market volatility remains unchanged.
How does this doubt alter business decisions? The researchers linked managers' uncertainty levels directly to their planned actions over the next three months. They found that higher uncertainty consistently depresses both employment and pricing plans.
Even when holding a manager's average sales expectations fixed, higher uncertainty makes a firm substantially more likely to trim its workforce and lower its prices. Rather than simply "freezing" decisions, uncertainty acts on executive mindsets much like outright pessimism.
Limitations and Context
These findings focus on German manufacturing firms during a stable macroeconomic period. While this design perfectly isolates how private, firm-level uncertainty operates in normal times, extreme aggregate shocks, such as global trade wars or financial meltdowns, might trigger additional behavior not captured here.
Why It Matters
If economic policy relies on the assumption that managers only care about statistical risk, it will miss how human business leaders actually make decisions. Recognizing that fast-growing and fast-shrinking firms both undergo periods of heightened doubt helps explain why business expansion often happens in fits and starts. For policymakers trying to encourage job growth, minimizing policy surprises and providing clear economic signals may be just as vital as lowering interest rates.
Learn More
Paper Title: Uncertainty and Change: Survey Evidence of Firms’ Subjective Beliefs
Authors: Rüdiger Bachmann, Kai Carstensen, Stefan Lautenbacher, Manuel Menkhoff, and Martin Schneider
Journal: American Economic Review
Publication Year: 2026
URL: https://www.aeaweb.org/articles?id=10.1257/aer.20240056
Econ Today Explains
Economic Concept: Subjective Uncertainty vs. Objective Volatility
In standard economics, objective volatility measures how much an economic variable (like sales or stock prices) actually fluctuates over time based on historical data. It is an objective metric calculated by an outsider looking at past events.
Subjective uncertainty, by contrast, reflects an insider’s personal degree of doubt about the future. It accounts for the fact that human decision-makers do not have perfect information. A manager might experience very stable sales today (low objective volatility) but still feel high subjective uncertainty if they are launching a new product or entering an unfamiliar market where they don't know what to expect. Understanding this distinction helps economists explain why real-world corporate planning often departs from theoretical models.
This article was written by AI but reviewed by a real human.
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