Some people claim that if you cannot measure it, you cannot manage it. Probably true, but you can overdo the measuring. How much precision is necessary?
The answer of course is, “That depends.” The depends part follows on from the idea of what and how to measure things that matter. Telephone numbers cannot be approximate and still work. Precision in building a brain surgeon’s scalpel is somewhat higher than the precision for a butter knife.
The key is that you select some result that you value and select a way to measure your method so you can revise it if it turns out to be wrong.
No matter the method, there will always be error. Like golf. A putt in the center of the cup or one that falls in the left side are each worth one stroke. They don’t ask you how, they ask how many.
Some degree of precision will put you in the general area of your goal but more than that uses resources that might better be used in other ways. For financial planning purposes a rate of return to zero decimals is likely as precise as you want to be. There is a difference between 7.223% and 7%, but on a year to year review, it is not material enough to make you change an otherwise workable tactic.
The detail that started me thinking about precision and its relative value is this one.
Pi has been calculated to 13.3 trillion decimals.
As we all know from grade school Pi is the ratio of a circle’s circumference to its diameter and we used 3.14 for calculation purposes. Sometimes 22/7.
Not good enough you say. 13.3 trillion decimal accuracy must be better than two decimals. How much better, and does the increased precision matter?
Consider that the diameter of the universe is 92 billion light years. That is about a 1 followed by 40 zeroes if measured in millimeters. Pi times that would be the circumference.
The diameter in millimeters of the nucleus of a hydrogen atom is 1 divided by a 1 followed by 15 zeroes.
55 decimals of pi would describe the ratio of the circumference of the universe to its diameter with an error no more than the width of a hydrogen nucleus. What then are the rest of the digits measuring? A quark? 58 digits would do that.
While not quite as extreme, your financial plan does not benefit from precision beyond a reasonable guess. Numbers mean little by themselves. Address number results in terms of what they mean to you. Greater precision adds little and it costs you to get it.
Overemphasizing minutia costs and leads to poor decisions.
Don Shaughnessy is a retired partner in an international public accounting firm and is now with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario.