Leonard Mlodinow: The Drunkard's Walk: How Randomness Rules Our Lives (Vintage)Great insight for investors seeking to distinguish real indicators from random noise.
Kate Kelly: Street Fighters: The Last 72 Hours of Bear Stearns, the Toughest Firm on Wall StreetGood read, good info -- a building block for anyone trying to figure it out. What the heck happened!??
Michael Shermer: Why People Believe Weird Things: Pseudoscience, Superstition, and Other Confusions of Our Time
Graham T. Allison: Essence of Decision: Explaining the Cuban Missile Crisis (2nd Edition)A seminal work on decision-making.
Mancur Olson: The Logic of Collective Action: Public Goods and the Theory of Groups, Second printing with new preface and appendix (Harvard Economic Studies)
Andy Kessler: Wall Street Meat: My Narrow Escape from the Stock Market Grinder
Roger Lowenstein: When Genius Failed: The Rise and Fall of Long-Term Capital Management
Robert A. Caro: Master of the Senate: The Years of Lyndon Johnson, (Vintage)
Ken Uston: Million Dollar Blackjack
Edwin Lefèvre: Reminiscences of a Stock Operator (A Marketplace Book)
Neil Browne: Asking the Right Questions: A Guide to Critical Thinking (8th Edition)
Ralph Vince: Portfolio Management Formulas : Mathematical Trading Methods for the Futures, Options, and Stock Markets
Malcolm Gladwell: Blink: The Power of Thinking Without Thinking
Brett N. Steenbarger: Enhancing Trader Performance: Proven Strategies From the Cutting Edge of Trading Psychology (Wiley Trading)
Robert J. Shiller: Irrational Exuberance
Gene Epstein: Econospinning: How to Read Between the Lines When the Media Manipulate the Numbers
Edward R. Tufte: The Visual Display of Quantitative InformationThe authoritative work on the subject.
Murray Edelman: The Symbolic Uses of Politics
Gary Belsky: Why Smart People Make Big Money Mistakes And How To Correct Them: Lessons From The New Science Of Behavioral Economics
Laurence H. Meyer: A Term at the Fed : An Insider's View
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As one of the very few political science/public policy experts analyzing investments, I try to take note of situations reflecting concepts from these fields. As regular readers know, it is not a matter of being smarter than everyone else. Far from it. I search constantly for information, even from unlikely sources. A principle here at "A Dash" is that looking at a problem from differing perspectives often suggests wildly different results.
Prediction Requires Understanding
To predict behavior you first must understand it. Sometimes examples are the best place to start, so please consider these.
The 2008 Crisis
At the time of the 2008 post-Lehman financial crisis, there was an active public policy debate. Here are some key quotations:
Before going to the Hill, I briefed Obama and McCain....I overcommunicated with both candidates because I understood that if either of them made...any part of the crisis into a campaign issue to win political popularity, we were dead. I told them that the Fed had to take action and made the point that we were protecting taxpayers---not bailing out shareholders. Again I asked both of them not to characterize this as a bailout.
and later in time --
Obama was creeping ahead, and McCain was trying to distance himself from the Bush White House. He was slinging populist rhetoric on the campaign trail, excoriating Wall Street, talking about protecting taxpayers, and using the word bailout.
So who was the source of these statements? Barney Frank? Harry Reid? Nancy Pelosi? Ben Bernanke?
Actually it was Bush Administration Treasury Secretary Hank Paulson.
Yes, I am talking about a pillar of the conservative establishment, a former Goldman Sachs CEO, and someone who, when he began his service, would never have guessed that he would wind up leading the TARP initiative, as well as other rescue attempts.
And by the way, neither would his President, George W. Bush, who began the crisis in full opposition to anything that could be called a "bailout."
The interesting question is how could this possibly happen?
The Classic Example
Consider what might be the most important decision by anyone -- Truman's decision to drop the atomic bomb. You might expect that this would require a careful and rational analysis, exhaustive debate, and a soul-searching decision.
The facts were quite different.
This was a classic example of what is called a "non-decision." It is something that happens when you do not act, in this case to deflect the existing course of policy. The key points to note are the overwhelming consensus about the purpose of the Manhattan Project and the portrayal of risk (the loss of millions of US and Japanese lives in an invasion of Japan).
The implication, strongly supported by the lengthy and authoritative Truman biography, is that you or I would have made acquiesced in the same way had we been in Truman's shoes.
Some Useful Applications
There are two immediately useful applications for these principles. Both are crucial for investors.
Monetary policy is the subject of both policy debate and prediction. Some have suggested the appointment of non-traditional candidates to the Fed. The suggestions, perhaps whimsical, have included housewives, economic bloggers who are not economists, and vocal Fed critics. Would this make any difference in Fed policy?
No.
I already knew the answer, but at the Kauffman Foundation gathering of economic bloggers I asked Bob McTeer (former Dallas Fed President and a featured source who combines intelligence, wisdom, and experience) what would happen in the case of a non-traditional appointment. I mentioned some of the examples.
Since I did not really put Bob "on the record" I will merely summarize his viewpoint and allow him to chime in if he wishes. He first observed that the Fed staff was extremely talented and able and had access to the very best information. It was difficult to improve on their findings. I nudged this a little, asking what about those who disagreed with the staff approach. He said that dissent was possible, but that arguments had little effect when not placed in the context of the general analytic framework.
In political science and sociology these effects are referred to as recruitment and socialization. An organization generally recruits people whose values and approach is consistent with organizational norms. New members go through a process of socialization where they learn what sort of argument is effective. It is completely predictable behavior for the Fed, Morgan Stanley, BP, or any other organization. Investors would do better if they understood social science principles.
Fiscal policy is the subject of debate between groups that I will loosely characterize as Keynesians (new-, post-, neo- or whatever) and non-Keynesians (Austrian economists or whatever variant). In a short article I cannot avoid some generalizations, so let me just say that the latter group thinks we should aggressively address deficits and let the chips fall where they may. The Keynesians embrace and accept debt as a road to economic recovery when the economy is threatened.
Since real leaders, especially elected leaders, are not willing to attempt the Austrian experiment, the actual decision process can easily be predicted. Any skeptics should go back and review the Hank Paulson quotations above, and note the focus on "saving the system."
Investment Conclusion
I am going to emphasize once again that this article is not about which monetary policy or fiscal policy is correct. I am trying to explain how to predict government actions.
It is descriptive, not prescriptive. Many pundits who have strong beliefs are not able to step away to analyze what will happen, and the likely investment implications.
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