02 March 2017

Dynamic Economic Decision Making

Strategies for Financial Risk, Capital Markets, and Monetary Policy

John E Silvia
2011, John Wiley, 382 pages,
ISBN 9780470920510

Reviewer: Dame Kate Barker

John Silvia is the Chief Economist at Wells Fargo, but also teaches on MBA courses.  This book is the first of a series; two more have been published since this one: on time series analysis, and most recently one on the use of statistics in an imperfect economy, dealing with imperfect information. 

This title is aimed at business decision-makers as well as the economists who support them, and I have borne that in mind while reading it. It begins with a good outline of decision-making as a process.   The chapters run through discussions of a range of themes, from economic dynamism to financial markets to strategy and the role of information.  Each chapter starts off with a historical example (many unknown to me) and then lays out a little bit of economic theory before moving on to describe the context in which decisions in this area are taken, and how that context has changed. 

To give the flavour: the section on risk modelling discusses how the framework we use for decisions could be wrong, or we could be wrong about how we are evaluating change in that framework.  Taking the example of the US housing market in the run-up to the financial crisis, Silvia observes that there were (at least) two flawed assumptions: that US house prices would always rise, and that households would want to pay off their debt rather than walk away from it.  The section then moves on to discuss many other facets, including how to use econometric models to spot that the world is changing, and the problem that we too often dismiss deviancies from past behaviour as insignificant or temporary, whereas in fact they can indicate a much more significant change.  

Throughout the book, Silvia refers back to the key sources of bias that stop us taking good decisions: recency bias (attaching too much weight to the latest data, which is often flawed); confirmation bias (preferring models which conform to our prejudices); and anchoring bias (organisations often assume only small changes to their model are needed).  In addition, we are often misled by illusory correlations, which Silva calls the lazy path to analysis. 

For economists, the sections reprising pieces of theory or setting out what bits of data mean will be familiar.  However the multiple examples of when judgments and decisions have gone right (or, more often, been horribly wrong) are more interesting.  In some places there were perhaps too many examples, so that it became harder to follow the thread of a section. 

Overall this book would be very useful to those starting out in business or business economics, if only for the reminder that we all tend to put too much faith in the current paradigm, and are too slow to notice that it has changed.