The trouble with simple numbers...
We are slaves to numbers – and since numbers form the basis of price – we are also slaves to price. We use price to inform our day-to-day decision-making, and frequently ask “how much?” before concluding the most basic of transactions. The “how much” line
The concept of price – what the owners of goods and services “ask” for the provision of the same – has engaged economists for decades. That’s why your economics 101 textbook is chock full of chapters explaining how supply and demand affect prices. While economists worry about factors influencing price, it is left up to asset managers to take price analysis to the next level. You see, asset managers are not “fooled” by the sticker price on the companies (shares) they buy or sell… And while their decisions also involve simple numbers – prices if you prefer – they are more interested in the concept of “good” prices. Fund managers with a value-based investment approach will spend hours determining the value of a prospective investment before determining a price that makes the investment worthwhile. They want deep value at the right price!
The numbers almost always lie
I started thinking about numbers after attending a presentation by Sanlam Employee Benefits (SEB). During the post-presentation question session we turned our attention to the Reduction-In-Yield (RIY) frequently quoted in the life insurance and retirement savings space. In layman’s terms RIY is by how much administration fees will eat into the return generated on your retirement fund or investment each year. So if the fund generates 10% per annum – and the RIY is 1% – your investment return is a net 9% over the period. This “simple” 1% does not sound like much, but compound it over the duration of investment term and it soon reaches staggering proportions.
Unfortunately the RIY quoted by major retirement funds or produced by studies of retirement markets (as quoted in a recent National Treasury survey on costs in the retirement savings industry) are difficult to compare. Actuaries can make a number of assumptions in their RIY calculations with the result straightforward like-for-like comparisons are meaningless. This situation led to the Collective Investments Schemes industry adopting a different comparative measure of fund manager costs, namely the Total Expense Ratio (TER). This number solved one problem – in that investors could compare TER from one unit trust fund to the next – but it also created another.
Although the lists of expenses included in and excluded from the TER calculation are comprehensive, it is possible – by fiddling with internal fee definitions, for example – to make TER on one fund appear relatively more attractive to another. The point I am driving at is that consumers cannot “take as written” that numbers such as RIY and TER are infallible, nor that they are comparable between one opportunity and the next. They are simple numbers that should be taken with the proverbial “pinch of salt”.
Banks and insurers are masters of meaningless numbers theory
Meaningless numbers feature prominently in the marketing campaigns of most major financial institutions. Banks are prime culprits in this regard – trumpeting their superiority in terms of fees – when Average Joe has no reasonable chance of making an accurate comparison with competitor products. A bank might offer a standard package that appears cheaper than its competitors – and a price-obsessed consumer will jump at the opportunity without considering the actual services packaged in the “bundle”. The price – or the simple number – associated with the banking product is totally unrelated to the fee the consumer will end up paying for the service.
Direct insurers – who flog their personal lines motor and household contents policies on the uninformed – revel in this form of “simple number” marketing too. They hook consumers on price in the knowledge consumers will not question value. And they are not scared to cross ethical boundaries while doing so...
The numbers will always favour those presenting them
A few weeks ago the country’s leading short-term direct insurer was brought to task for using comparative quotes in its television advertising campaign. When this insurer discovered that their monthly premium (on a like-for-like insurance policy) was at the same level as three of the country’s large traditional insurers, they shopped around to find a fourth “extremely expensive” quote. The insurer then averaged the four quotes and advertised: Our premium “beats” the average monthly premium of four leading broker-based insurers… What a blatant lie! This is another classic example of how simple numbers are used to fool the unsuspecting consumer.
We encounter simple numbers – backed by statistics – on a daily basis without reflecting on what they mean or how they were conjured up. Politicians tell us our society is the most unequal in the world – and then back their claims with a simple number: South Africa’s Gini coefficient, currently at 0.7. Mail & Guardian Thought Leader, Reg Rumney, dismisses the number as the country’s “biggest cliché”. Politicians also dwell on the rights their near two-thirds majority gives them… Think about it – all this 66.67% “simple number” means is that they “speak” on behalf of 67 of 100 people in the subset that bothered to vote. Let’s fix this “simple number” postulation.
Say 45% of the electorate shows up to vote – and 67% cast their vote for the majority – and that only half of the majority party votes agree with a particularly draconian measure. By the time you re-work the numbers you might find that the majority view is in fact supported by a very small fraction of the eligible voting population – only 15% in our example – or 15 of every 100 people. Not even democracy works as a simple number!
Editor’s thoughts: There are dozens of examples of marketing departments and politicians using “doctored” statistics to influence our views. In the event they are questioned they can always defend their position by referring back to the tried and tested “statistics never lie”. You and I know better – because we prefer the phrase: “There are lies, damn lies and statistics!” Do you have any stories that illustrate the manipulation of simple statistics to push a particular cause? Please add your comment below, or send it to gareth@fanews.co.za
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