Outside the Box

Dynamic Economic Decision Making

John Mauldin

August 23, 2011

This week’s Outside the Box is from my good friend John Silvia, the Chief Economist at Wells Fargo and fishing buddy in Maine. He has written a powerhouse book called Dynamic Economic Decision Making: Strategies for Financial Risk, Capital Markets, and Monetary Policy.

Combining three intellectual disciplines – economics, business, and decision making – that have traditionally been taught separately, Dynamic Economic Decision Making forges a new path that redefines how we view business choices. And that is the main point of the book. So many business leaders and investors make decisions based on static factors, historical patterns, or straight-line assumptions that it is no wonder that all too many bad decisions are made. And worse, we train our MBAs to approach decision making with outmoded tools that have proved themselves worthless in the real world.

Jim McTague of Barron’s wrote:

“For the price of a book you receive the equivalent of a three-credit course from a top MBA program. Silvia, one of the nation's most astute economists, has written a comprehensive, accessible masterpiece on applied economics. The author is an able teacher: Anyone, novice or expert, will profit from this well-written book.”

I agree. Even though John sent me this book for review, I will download it to my iPad for $40! (note to my editor at Wiley, who published this book: Why can Silvia get $39 for Kindle and I get $12?) I get a lot of reading done as I travel, and this is one I want to get through.

I asked John to write a short piece to give us a flavor of his main points, and I don’t think you’ll be disappointed. You can get the book on Amazon at http://www.amazon.com/Dynamic-Economic-Decision-Making-Strategies (37% off).

Have a great week, and learn to enjoy volatility. And please get the fact that Silvia (and I) keep noting: We are not going back to the old days. We are in a brand new world and we need to deal with it.

Your actually looking forward to the future analyst,

John Mauldin, Editor
Outside the Box

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Dynamic Economic Decision Making

The Great Recession of 2008-10 demonstrated the power that macroeconomic and financial forces have to alter the risks and rewards that frame choices for both private and public sector decision makers. Moreover, these forces completely overwhelmed the complex, micro mathematical strategies that were the rage of many investors. Yet many approaches to decision-making in finance and economics are more like cookbooks—they tell you how to prepare a specific meal, step-by-step, but…

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Craig Cheatum

Aug. 24, 2011, 12:10 p.m.

I would add greed.  The subprime crisis was a boom for Wall Street becuase they could securutize mortages, get them rated as high quality (despite actaul risk), and the buyers could buy inexpensive insurance to mitigate any risk.  Well we found out the whole sceme was fraud with no basis for covering losses.  Also, the rise of K Street as the largest union in history (with some 261,000 lobbyists in DC) with the express purpose of extracting the maximum amout of money from taxpayers, can only be defined as greed by their sponsors. 

Craig Cheatum

Keith Wilson

Aug. 23, 2011, 7:18 p.m.

Dynamic business/economic decision making, and risk management in particular, are crucial to succeed in turbulent times (which we will most likely be in for an extended period of time).  The author makes valid arguments and lays out valuable and pragmatic concepts to adopt.  I totally agree that the benefits derived from dynamic planning and decision making should far outweigh the complexities of the task, and the increased vulnerability of the forecast itself when they are based on so many moving parts (our political environment would love to have such mutiple targets to be shooting at).  However, there is another bias that deserves attention, which is not discussed in this piece.  That is, the bias of positive outlooks.  Whether it is politics, public policy, business planning, stock analysis or financial media, there is a strong bias towards a positive spin, due to job preservation, ratings, image or other factors.  When was the last time any bank, policy wonk, mainstream media and/or economist, or sell side analyst forecast negative GDP or rising unemployment or greater trade barriers or the rapid erosion of savings from entrenched inflation, or a whole host of potential negative consequences that might be ahead for the US and the developed economies of the world?  What about the structural destruction of jobs and industries due to the progress brought on by technology?  There still tends to be a return to normal cycles and relationships among most prognosticators, including those at Wells Fargo.  Unless there is a cultural change to accept and adopt more meaningful and accurate dynamism in our decision making, the subjective variables used in these processes may just continue to be biased to the upside and continue to send the wrong signals.

Mike Mennell

Aug. 23, 2011, 7:05 p.m.

Excellent insight. Every CEO and politician needs to read this book.

John Chavanne 26807

Aug. 23, 2011, 5:38 p.m.

This article goes a long way toward explaining H-P’s decision to get out of the PC business. With the development of ‘cloud’ computing we are heading in the direction of simply using a device to submit data to an internet accessible program which will process that data as needed outside of our office and supply the reports, etc. that are needed.
The era where one would train for one type of work or process that would last a lifetime has come to an end. We must all be able to continually search out and train for the next creative opportunity. Until we realize this and adopt, unemployment will continue to become worse.
This should be a “Must Read” for everyone.

William Veeneman

Aug. 23, 2011, 1:45 p.m.

Worthy of sharing with my congressman. I’ll see him Friday (8/26/2011).

Jim Johnson

Aug. 23, 2011, 12:50 p.m.

I think the subject of decision-making is an important subject for study. But I had such difficulty wading through the many typos and cumbersome sentence structure that I am totally discouraged from reading the book.

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