Hedging Hell Stalls Businesses in Uncertain Times

In 2025, text-based measures of economic policy uncertainty reached record highs. This finding comes from an analysis in the International Monetary Fund's Finance & Development magazine, which highlighted the US Economic Policy Uncertainty index as a key signal of this surge in newspaper discussions of uncertainty.

Research on uncertainty shocks has shown that jumps of this scale can lead firms to delay investment and hiring. They often choose to wait rather than expand immediately when prospects are unclear, even if underlying demand has not yet weakened.

These conditions make a pattern sometimes described as "hedging hell" more likely. In this environment, firms keep negotiations, contracts, and hiring plans open without firm commitments. As a result, decisions depend on other decisions that are also unresolved.

The outcome is not only slower capital spending but also a coordination problem across supply chains, financing arrangements, and compliance processes. Real-options theory and empirical evidence on uncertainty shocks help explain why these pauses occur and how they can spread through business ecosystems.

Real-Options Logic Behind the Wait

Economist Ben Bernanke's working paper for the National Bureau of Economic Research argued that when investment is difficult to reverse and new information arrives over time, uncertainty raises the value of waiting. He suggested that investment should proceed only when the cost of deferring a project exceeds the expected informational gain from waiting, as summarized by the NBER.

This logic treats the timing of an investment as an economic choice in its own right. By postponing a decision, the firm effectively purchases an option on better information about future returns. At the same time, it exposes itself to the risk that opportunities may be lost if favorable conditions are short-lived.

Avinash Dixit and Robert Pindyck extended this framework in their book from Princeton University Press. They described how irreversibility, uncertainty, and flexibility in timing can strongly influence investment behavior. This makes simple net present value rules incomplete when firms can delay.

In their real-options view, many capital spending choices resemble call options. This is because exercising the option locks in a path and eliminates flexibility to adjust if conditions change. The more volatile the environment and the more irreversible the commitment, the longer it can be rational to wait.

The same logic applies to contracts and business development decisions that involve reputational, legal, or operational commitments that are hard to unwind. A systems integrator weighing a long-term service agreement, for example, may treat signing as an irreversible step. The downside is large if regulations, customer budgets, or technology standards move in an adverse direction.

Evidence From Uncertainty Shocks

Nicholas Bloom's analysis of uncertainty shocks was first circulated as an NBER working paper and later published in Econometrica. It used spikes in stock market volatility as a proxy for surprise jumps in uncertainty. The research showed that such jumps are followed by rapid declines and then rebounds in output, employment, and productivity.

The structural model in the NBER version of the study found that after a large uncertainty shock, firms temporarily reduce hiring and investment. They treat waiting as a way to learn more about future conditions before committing resources. The study also found that productivity growth falls in part because this pause in activity slows the reallocation of labor and capital across units.

Once uncertainty recedes, firms tend to address pent-up demand for labor and equipment. This helps explain the quick rebound that follows the initial drop in activity in the simulations and in the macro data examined in the paper.

These dynamics are consistent with the real-options view. Higher uncertainty makes inaction more attractive when decisions are hard to reverse, so firms wait. They then adjust more sharply after uncertainty resolves. In sectors with large sunk costs or long project lead times, this pattern can be especially pronounced.

Reading the Policy Barometer

To move from firm-level models to macro indicators, Scott Baker, Nicholas Bloom, and Steven Davis developed a newspaper-based Economic Policy Uncertainty index. It counts the frequency of articles mentioning combinations of economic, policy, and uncertainty terms across major newspapers. This methodology is documented in their 2015 working paper for the National Bureau of Economic Research.

The public data series, maintained at policyuncertainty.com, shows that the index typically spikes around major shocks. These include the 2008 financial crisis and the 2020 COVID pandemic. The IMF Finance & Development article reports that the US index reached a record high in 2025, indicating unusually intense discussion of uncertainty in national and local media.

The NBER paper on measuring economic policy uncertainty finds that innovations in this index tend to precede declines in investment, output, and employment. This pattern holds in the United States and across several other economies. It suggests that high policy uncertainty is associated with weaker near-term activity even when other conditions are unchanged.

Periods in which policy uncertainty remains elevated for longer can therefore extend the time during which the option value of waiting is high. In those conditions, more firms will find it rational to defer irreversible commitments and to favor spending that can be reversed at low cost.

From Firm-Level Pauses to Supply Chain Stalls

When many firms respond to uncertainty by preserving optionality at the same time, the effects can extend beyond any single balance sheet. Each firm may keep multiple contract scopes, delivery dates, and pricing scenarios open. Managers must then devote time to updating and negotiating these contingencies instead of finalizing a smaller set of confirmed plans.

In relationship-dense sectors such as aerospace or large infrastructure projects, individual orders depend on aligned commitments from several tiers of suppliers and service providers. If a single vendor delays a decision, upstream and downstream milestones can be rescheduled together.

Firms also track many provisional projects in planning tools and internal reviews when uncertainty is high. These work streams consume meeting time, forecast revisions, and legal review even though they may never move into execution. This raises the operational cost of keeping options open.

Because few firms operate in isolation, these overlapping delays can reinforce one another. A supplier may hesitate because a key customer has not yet confirmed demand. That customer, in turn, waits for clarity from its own end users or from regulators. Each side conditions its decision on the other.

Reducing Coordination Failures

One way to reduce the impact of hedging hell is to link investment and contracting decisions to objective triggers. Examples include approving a project when a final regulation is published, when a commodity price remains within an agreed band for a defined period, or when a specified range of macro indicators is met.

Such triggers do not remove uncertainty, but they provide a transparent rule for moving from provisional planning to execution. That can shorten internal debates about timing and reduce the number of parallel scenarios that managers must maintain.

More open sharing of demand forecasts and scenario assumptions with key suppliers can also help, even if it reduces informational advantages in the short term. If firms across a supply chain understand the conditions under which their partners will commit, they can design compatible triggers and avoid misaligned pauses.

Financing structures can play a similar role. Staged funding tied to verifiable policy or regulatory milestones allows investors and borrowers to treat large projects as a sequence of smaller, partially reversible steps. This fits the real-options logic while still enabling progress when uncertainty is high.

Outlook

The IMF Finance & Development article on uncertainty describes 2025 as a period in which text-based indicators signaled very high uncertainty. Meanwhile, market-based and survey-based measures showed more moderate changes. The article concludes that elevated uncertainty is likely to slow growth mainly by reducing investment, hiring, and spending on durable goods over the following one to two years.

If future shocks push policy uncertainty higher again, firms that have already defined decision triggers may be better able to keep investment and reallocation moving. Those that have shared planning assumptions with key partners and structured financing around observable milestones can limit the depth and duration of hedging hell. This is true even when the macroeconomic outlook is unsettled.

Sources

• Ben S. Bernanke. "Irreversibility, Uncertainty, and Cyclical Investment." National Bureau of Economic Research, 1980.
• Avinash K. Dixit and Robert S. Pindyck. "Investment under Uncertainty." Princeton University Press, 1994.
• Nicholas Bloom. "The Impact of Uncertainty Shocks." Econometrica, 2009.
• Nicholas Bloom. "The Impact of Uncertainty Shocks." National Bureau of Economic Research, 2007.
• Scott R. Baker, Nicholas Bloom, and Steven J. Davis. "Measuring Economic Policy Uncertainty." National Bureau of Economic Research, 2015.
• Hites Ahir, Nicholas Bloom, and Davide Furceri. "Uncertainty About Uncertainty." International Monetary Fund, 2025.