Context Matters When Assessing Statistics

Assessing financial information with no context is a fool’s game.

Making 15% in a year may be very good, indifferent, or very poor.  Which market?  Which year?  Could your replicate it?  What was the “right” rate of return for your particular plan?

Each of no goal, no knowledge of how the result came to be, and no objective standard, all lead to weak overall assessment of meaning.

Performance numbers matter, but for just one reason.  To inform the next decision.

If you have no goal, then the performance cannot tell you anything about your progress.

If you do not know how you did it and how to do it again, then the number is pretty much just random.  Purple would be as valuable a description.

Having no idea of the objective standard again makes the number useless.

Sometimes people confuse standards.  It happened a lot in the late ’90s when people who typically had term deposits at 9% found rates had fallen and switched to investment funds.  Some thought these would behave like term deposits.  2000 was unpleasant.

A story about standards.

A man comes upon another man playing chess with a dog.  After a little while he exclaims, “That is a very smart dog.” to which the dog’s opponent replies, “Not that smart.  I can beat him 7 out of 10 times”

The moral.  Despite that the dog is not a good chess player, people should not judge him by chess player standards.  Know why the standard is appropriate and has meaning before you rely on anything related to that standard.

Be cautious when reporting or receiving financial performance information.  If you have no way to know what was wanted, needed, or what it should be, you are likely better without it.  Knowing that you have no information is usually a better condition than holding information that has no meaning.

Contact: don@moneyfyi.com  

Don Shaughnessy is a retired partner in an international public accounting firm and is presently with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario.

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