What Is Wrong With This Picture?

There are many ways to use information to make a misleading point.  Statistics are one but graphs are another.  Graphs are more insidious because our natural skepticism for numbers is not present.

This graph came my way yesterday and it is interesting.  The message with it is essentially, “If you own equities, you should bail now because the sky is about to fall.  Only gold and diamonds will save you.”

I am skeptical of any message to be learned from the chartists, but they make for good entertainment and sometimes they can make you do deeper research.

What is wrong with it?

Never believe a chart unless the axis references are on the same basis.  In this case we have the Dow currently on the left and the Dow in 1928-29 on the right.  The charts would be acceptable if not presented together.  Presenting them together implies that the lines are comparable.  In this case they are not. By using a different scale, you get a misleading impression of the events.

On the right hand axis, the 1928-29 Dow about doubled in the 18 months shown.  Around 190 to around 380.  Double in 18 months means large, fast growth.

The current Dow related to the left axis, shows that in the 18 months leading to December, the value went from around 12,800 to around 16,000.  Increase 25%.  While significant, a long way from a double.  For the current Dow to be proportionally the same as the 1928-29 Dow, its present value would be over 25,000.

If the Dow was at 25,000 now, double 18 months ago, I would be running for the exits too.

You could get the idea if you plotted out the two curves using a common axis.  Instead of using the index value, it would use the amount of change as the Y-axis.  If you would rather not do that work, you could agree to follow the blog at Quartz.  qz.com  They have already done the graph for you.

I doubt anyone would think that the message delivered by the second chart supports the one delivered by the first.

A good rule of life is that anything that looks intuitively obvious is probably misleading.  It is very easy to be caught up in this world of illusion.  If “facts” are presented together with a proposed course of action, it wise to notice who will benefit.  If it is probably the fact presenter, then you should reconsider the information.

Correct data is not necessarily useful data.  Comparing apples and bananas as the first graph does, is only one of many tricks available.  Be aware of the possibility that you are being manipulated.  Learn some simple warning signs.  Like graph axes that are not the same for both variables.

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.