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More About This Title Dynamic Economic Decision Making: Strategies for Financial Risk, Capital Markets, and Monetary Policy + Website
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Financial decision-making requires one to anticipate how their decision will not only affect their business, but also the economic environment. Unfortunately, all too often, both private and public sector decision-makers view their decisions as one-off responses and fail to see their decisions within the context of an evolving decision-making framework.
In Decision-Making in a Dynamic Economic Setting, John Silvia, Chief Economist of Wells Fargo and one of the top 5 economic forecasters according to Bloomberg News and USA Today, skillfully puts this discipline in perspective.
- Details realistic, decision-making approaches and applications under a broad set of economic scenarios
- Analyzes monetary policy and addresses the impact of financial regulations
- Examines business cycles and how to identify economic trends, how to deal with uncertainty and manage risk, the building blocks of growth, and strategies for innovation
Decision-Making in a Dynamic Economic Setting details the real-world application of economic principles and financial strategy in making better business decisions.
English
English
Acknowledgments xvii
CHAPTER 1
Dynamic Decision Making 1
Problems Change—Why Not Solutions? 3
Developing a Dynamic Decision-Making Process 7
Discussion Questions 19
Notes 21
CHAPTER 2
Measuring Economic Benchmarks 23
Benchmarking Growth 24
Components of the GDP 27
Benchmarking Inflation: Pricing Power and the Cost of Goods Sold 36
Interest Rates: Real Nominal, the Short and Long End of It All 41
Exchange Rates: A Relative Price with Many Relatives 45
Profits 48
Unbiased Information: Biased Users 50
Discussion Questions 51
Notes 52
Recommended Reading for Serious Players 53
CHAPTER 3
Cyclical and Structural Change 55
Forces of Economic Success 55
Cyclical Patterns, Linear Projections 57
Leading, Coincident, and Lagging Economic Indicators 59
Identifying Trends and Cycles 64
Bias in Decision Making 66
Cycles, Structural Change, and the Evolution of a Framework 73
Discussion Questions 78
Notes 79
Recommended Reading for Serious Players 80
CHAPTER 4
Economic Dynamism: Growth and Overcoming the Limits of Geography 81
A Framework for Growth 83
Population Growth and the Westward Expansion of the United States 88
Institutions and the Savings/Investment Decision 90
Why Does Capital Not Flow to Poor Countries? 92
Overcoming Geography: Stretching the Production Possibilities Curve 92
The Competitive Implications of Altering the Exchange Rate 95
Growth, Opportunity, and Preservation 96
Discussion Questions 97
Notes 99
Recommended Reading for Serious Players 99
CHAPTER 5
Information: Competitive Edge in the Twenty-First Century 101
Information in an Existing Business 102
Information as an Input to Today’s Competitive Advantage 103
Information in a New Growth Business 104
Information as Input to the Decision Process for Firms and Households 106
Three Steps of Information Processing for Decision Makers 107
Information in the Decision Maker’s Framework 116
Information as Part of the Business Model 117
Choices and Information Choke Points 119
Discussion Questions 119
Notes 121
Recommended Reading for Serious Players 122
CHAPTER 6
Risk Modeling and Assessment 123
Economics and the Risk Modeling Process 124
Housing Prices: Deflation and the Shock to the American Psyche 129
Managing Economic Risk within the Decision-Making Process 132
Assessing Risks Using Econometric Models 138
Identifying Change 141
Principles for a New Model 153
Discussion Questions 155
Notes 157
Recommended Reading for Serious Players 158
CHAPTER 7
Money, Interest Rates, and Financial Markets 159
Markets before Institutions 162
Markets: Interdependence and the Driving Force of Unexpected Events 162
Change and Putting Our Framework through Its Paces 166
Short-Run to Long-Run Adjustment 170
Quality Spreads, the Economic Cycle, and Accounting for Risk 172
Evolution of the Money, Inflation, and Interest Rate Framework 173
Lessons for Decision Makers 175
Discussion Questions 176
Notes 177
Recommended Reading for Serious Players 178
CHAPTER 8
Strategy, Risk, Uncertainty, and the Role of Information 179
Four Levels of Strategic Thinking 180
Discussion Questions 197
Notes 198
Recommended Reading for Serious Players 198
CHAPTER 9
Capital Markets: Financing Operations and Growth 199
Engine of Analysis: The Market for Real Capital and the Market for Funds 200
Perspective of Change over Time 201
Economic Change as Driver of an Evolving Capital Market Framework 203
Complex Interactions: Economics, Expectations, and Information 205
The 1980s: Another Decade, Another New Normal for the Financial Markets, and the Critical Role of the Recency Bias 208
Internal Cyclical Changes in Capital Markets and the Overconfidence Bias 210
Two Underappreciated Forces in Financial Markets Are Irony and Paradox 211
The Great Recession of 2007 to 2010: Under the Heading That Facts Don’t Matter until They Do 212
Economic Evolution and the Changing Risk/Reward Calculation 213
Price Dichotomy: Traded and Non-Traded Goods 215
Introducing the Wake-Up Call 216
Precise Mathematics Gives Way to Imprecise Reality: What Happens to Markets When the Average Expected Return and the Variability of Returns Become Uncertain? 217
Choices: Reacting to Feedback—The Most Dangerous Phase of the Credit Cycle 221
Credit Crunches: When Markets Don’t Clear 224
Capital Markets and the Life Cycle of an Institution 226
Capital Markets and the Allocation of Capital 230
Discussion Questions 232
Notes 233
Recommended Reading for Serious Players 235
CHAPTER 10
Financial Ratios: The Intersection of Economics and Finance 237
Financial Ratios 237
Developing a Framework within a Broader Economic Setting 240
Financial Ratios as Information 248
Discussion Questions 267
Notes 268
Recommended Reading for Serious Players 270
CHAPTER 11
Fiscal Policy as Agent of Change 271
Fiscal Policy over Time: Altering Incentives and Rewards of Risk Taking 272
Public Policy and Private Expectations—the Lucas Critique 284
Interdependence between Fiscal and Monetary Policy 285
Policy in the Context of Expectations and Information 289
Long-Run Equilibrium versus Short-Run Equilibrium 292
When the Long-Run Outlook Impacts Today’s Behavior 294
Political Business Cycle: Political Realities for Private Decision Makers 296
Fiscal Policy in an Open Economy: The United States in the Twenty-First Century 298
Discussion Questions 298
Notes 300
Recommended Reading for Serious Players 301
CHAPTER 12
Global Capital Flows: Financing Growth, Creating Risk and Opportunity 303
Building a Framework for Understanding 304
A Model of Capital Flows to Frame Our Decisions 306
The American Framework in Global Capital Markets: The Evolution of Imbalances 313
Global Interest Rates 320
Risks and Opportunities: Not All Countries Fit One Mold 323
Implications for Decision Makers: Introducing Risk into the Global Capital Markets 328
Feedback, Altered Expectations, and Building the New Framework 330
A New Framework and the Overconfidence Bias 332
Discussion Questions 332
Notes 333
Recommended Reading for Serious Players 334
CHAPTER 13
Innovation and Its Role in Economics and Decision Making 335
Innovation and the Economy 336
Innovation and the Patterns of Progress 349
Risk, Innovation, and Prospect Theory 352
Innovation, Economic Thought, and the Big Challenges of the Day 354
Discussion Questions 357
Notes 358
Recommended Reading for Serious Players 359
APPENDIX
The Hodrick-Prescott Filter 361
Autoregressive Conditional Heteroscedasticity (ARCH) 365
About the Author 369
What’s on the Companion Web Site 370
Index 371
