moneyFYI
Financial Freedom Is Merely Organized Common Sense
Is 99% Good Enough?
The Mexican government recently stated that the country is 99% safe. Do statements like that have any value?
Maybe.
If I am capable enough to recognize that 100% safe is not possible anywhere, then I suppose 99% safe is pretty good. The problem is I don’t understand the Mexican standard. Is their 99% the same as mine? Most likely not.
It would make more sense if they said 99% of the geographical places in the country are safe. I can work with that, if they supply detail of what is not safe. Then I might want to know if the areas are contiguous or random. How can I tell which? Do they ever change? Does it mean the other areas are 100% safe? If less, how much less? On the basis of geography I think 99% safe is not meaningful.
Perhaps it means that for a randomly selected tourist group of 100 persons, only 1 will be murdered during the course of their stay, while the other 99 will be unharmed in any way. No chance that this representation of 99% safe is good enough for me.
Essentially, their statement is meant to accomplish a goal. They want to convince you that 99% safe is acceptable; very good even. You should visit and spend money.
Upon examination, 99% safe does not say anything useful.
Percentages are, typically, meaningless. They are almost always used to confuse rather than illuminate.
If I tell the truth 99% of the time and lie to you 1% of the time, do I claim 99% credibility? I think not. If I lie or mislead you a small portion of the time, then I will have no credibility whatsoever. It is like the famous boxing promoter Bob Arum’s statement, “Okay I lied to you yesterday, but today I am telling the truth.”
The Rasmussen Report on 29 January 2013 pointed out that the congressional job approval rating is 9%. I think it is safe for us to assume that most people think that congress has putting it politely, over-promised and under-delivered. Low credibility for sure.
I don’t suppose it is possible for a politician to tell the story exactly the way it should be 100% of the time. The world is too complex. Simplification is necessary. Be careful. Selected simplification is not measurably different from lying. They call it “spin.” If you are spun, I think it is at least partly your own fault.
Weak observation and analysis skills will serve you badly. I recall one of my sons coming home with 88% in calculus and thinking that was pretty good. I asked him about the class average. His well-informed response was, “It is 81, but that probably doesn’t matter. Most of them cannot figure out averages or percents.”
Learning to use statistical information is important. There are too many people willing to take advantage of your weakness. Learn the fundamentals at least.
Here is one fundamental. If you are trying to understand a percentage, understand the population of observations from which it was drawn. If you do not pay attention to the population, true statistics, presented by selecting the population incorrectly for the purpose, can easily fool you. For example, the average Canadian has slightly fewer than one testicle, is a meaningless statistic. Nonetheless, it is true.
Watch for populations where very few observations are like the average observation. I once thought about changing telephone carriers. I found a voice-over-IP service that had a an average satisfaction of about 6. Not so different than how I imagined my current carrier but much less expensive. Upon examination almost no one rated it a 6. They rated it 9 or 10, or 0 and 1. You love it or you hate it and there is no convenient way to find which will be my experience. I passed.
Some show you an arithmetic average when a geometric average would be appropriate. A 10-year accumulation at 5% will yield $1.63 for each dollar invested. The simple average is 6.3%. 6.3% looks better than 5%. I wonder why they would show you 6.3%. It is right but not the accepted way to report this sort of result.
End point bias is another trick some will use. By carefully picking where the statistic starts and stops, you can get some amazing spin. An investor needs to know that the period reported is likely to be governed by the same rules as the current period. For example, a fund that went to cash inadvertently, in August 2008 and got back in the market 6 months later will have a great 10 year track record up to 2019. It will be, with certainty, unable to recreate the conditions that gave them their return. So what does their average return really mean?
I have wondered if presenting statistical information to clients has any useful value. The people who do not get statistics will not benefit, and the people who do get statistics will assume you are trying to influence them in some way.
Statistical information is like circumstantial evidence. To be useful, it must connect to the event described and it must not reasonably connect to any other event. Like, “We found your fingerprint in the victims blood on the murder weapon.”
As a guideline, if you can explain how the statistic came to be, how this representation is appropriate for the purpose used, and what it means to the client, go ahead and use it. If not, then you should likely leave it out.
Don Shaughnessy is a retired partner in an international accounting firm and is presently with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario. don.s@protectorsgroup.com
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