Forbes is out with its annual look at the richest people in the world. This is a pointless exercise for many reasons, not the least of which is the unreality of the numbers. Let's say that Bill Gates has a crisis of some sort, and he has to turn all his holdings into cash. There's no way that he's going to be able to sell all his Microsoft stock at the same price; as he starts to sell, the price will drop, and the last share he sells will be at a severely lower price. But that's only a technical objection.
This is more a post about innumeracy. Take a quote from the Reuters story about this exercise:
They took all the billionaires on the list from last year, added up their values, then did the same for this year, and compared. This technique, however, is spurious, because, as is stated in the clause in the Reuters quote above, there are a lot fewer billionaires on the list.
It's as if we compared the wealth of two countries through GDP without correcting for the population - oh, wait, the press does that all the time, too. To be fair, Forbes does mention the average (down 23%), but the first number has no business being reported at all. If I had to guess, I would wager that I would find this impossible to explain to any news editor.
This is more a post about innumeracy. Take a quote from the Reuters story about this exercise:
The net worth of the world's billionaires fell from $4.4 trillion to $2.4 trillion, while the number of billionaires was down to 793 from 1,125.(The way Forbes itself put it is similar:
The world's richest are also a lot poorer. Their collective net worth is $2.4 trillion, down $2 trillion from a year ago.The reader is left with the impression that these chieftains have lost 45% of their riches. Perhaps that's supposed to make us feel better about the similar drops we've seen in our 401(k)'s. But, how did Forbes get these numbers?
They took all the billionaires on the list from last year, added up their values, then did the same for this year, and compared. This technique, however, is spurious, because, as is stated in the clause in the Reuters quote above, there are a lot fewer billionaires on the list.
It's as if we compared the wealth of two countries through GDP without correcting for the population - oh, wait, the press does that all the time, too. To be fair, Forbes does mention the average (down 23%), but the first number has no business being reported at all. If I had to guess, I would wager that I would find this impossible to explain to any news editor.
1 comment:
you love to rail on any bad reporting you can find, so now it's my turn: all these papers talk about "drops we've seen in our 401(k)'s", and I know I'm some kind of magical Johnny Jetpack, defying all the pitfalls of American labor, but I do manage all my assets independent of any employer, and one consequence is that I experienced no 401k losses. I know many who did, so I guess it's a legitimate statement. But if I blogged on such topics, one of my blog posts would be titled THE 401K SYSTEM IS FUNDAMENTALLY FLAWED. Or perhaps THE 401K MODEL WORKS UNTIL IT DOESN'T. WILL YOU LUCK OUT?
I have a much lower net work than the very rich. If I start losing even 5%, I get active. And since I manage it myself, I wasn't hindered by a limited choice model that often left people no choice at all. It's not a grand conspiracy to fleece the American worker, but it's a damned unfortunate and fundamentally flawed model for investing.
- mcfnord, who has a name
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