Principles, models and common sense

We all need models, principles and guidelines to assist us in being better men, husbands, dads, investors, businessmen, etc.  A non-emotional framework or lattice of formulas in our heads, through which we run every decision.  But we also need to add another part to our decision making, if we don't want to be misled from time to time by that framework.  That part is common sense.  An understanding of people and how they work, what really makes the world go round, the potential for human error, experience, internal gut feelings and rationality.

Take Long Term Capital Management, the hedge fund that was financially bailed out in 1998, for example.  They used complex mathematical models to take advantage of fixed income arbitrage deals usually with U.S., Japanese, and European government bonds.  They failed however to listen to common sense and entered into these speculations highly leveraged......sometimes 25 to 1.  They failed to heed the fact that the world blows up from time to time and people will act irrationally when that happens.  In fact, during the Russian financial crisis in August and September 1998, when the Russian government defaulted on their government bonds, panicked investors sold Japanese and European bonds to buy U.S. treasury bonds. The profits that were supposed to occur for Long Term Capital Management as the value of these bonds converged became huge losses as the value of the bonds diverged. By the end of August, Long Term Capital Management had lost $1.85 billion in capital.  This is just one example.  We all do this in one area or another in our lives.

Here's another example: the principle from Proverbs that all dads are to follow, to train up a child in the way that he should go.  "The way" is the easy part....toward God, His ways, Jesus Christ, the Scriptures and good works.  But in addition to this principle we need to understand each child in the unique way God has made him if we truly want to be effective in applying the principle: knowing how he best learns, what motivates him or discourages him, what callings and gifts are portrayed in his life, etc.  For instance, one of my children wilts with just a look of displeasure from me or my wife, another one needs a little more "parental" motivation.  Principles are important but they must balanced with common sense if we truly want to be successful in all areas of our lives.

Blessings,

Johnny B.