Brownie points for Tom. According to that same article, the drop was the 17th biggest drop on a percentage basis. Imagine that headline: "17th biggest drop in history!!!!" Not as panic inducing eh? Back in the depression the Dow has dropped by more than 20% (and by the way we survived that as a country didn't we?).
This goes with the principle of making sure one understands what's relevant: absolute or relative. In this case, what's relevant is how much money an individual person gains or loses. OK the Dow drops 777 points. Do I lose 777 dollars? No. Dow drops 5%? Does that mean I lose 5% if I own the Dow? YES!
Here's another illustration, this time where absolute matters but relative should not. If you were hungry and wanted to buy a candy bar, which sells in the vending machine for $1. You go up there, and they've raised the prices to $10. Would you still buy the candy bar? Heck no, you'd go to another vending machine or you'd just go without it. But let's say you wanted to buy a 42 inch LCD TV. You go to Best Buy, and it's selling for $1,523. You're about to buy it, but then a customer there says "Wait, don't buy it... I know for a fact they're selling it for $1,513 at Circuit City." Would you be inclined to go to Circuit City? Probably not. But yet it's the same $10.
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7 comments:
ironically, people would, contrary to your opening line, answer "well, it's all relative" to the final example.
Out of curiosity, what are your opinions on the bailouts?
Well, the DJIA is the most f-ed up stock index in the world. I can't even believe it's being used today. So it may be fitting to apply an inaccurate comparison to an inaccurate index.
I agree! I think the last example, the difference is that a candy bar is not worth $10 to me but the time saved from not going to a different store is worth $10.
I would buy the $10 candy bar but go to Circuit City to get the cheaper TV. Why? Because the candy car difference is only $9 whereas the TV was $10 difference. =)
Off topic:
http://freakonomics.blogs.nytimes.com/2008/09/29/do-good-grades-predict-success/#more-3057
I thought of you and some of your "rants" when I read this article.
Good stuff Katherine, thanks!!!
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