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Investing and Innumeracy

A political gaffe points to widespread innumeracy--something that leads many of us to bad investment decisions...

A couple of weeks ago, a matter of statistics became an amusing political controversy. Rahul Gandhi was reported to have said that 70 per cent of Punjab’s youth were drug addicts. The statement was hotly derided by the state’s government. In response, Mr Gandhi and some others pointed out that the figure was taken from an affidavit filed by the state government in the high court. After this, the whole matter dissolved into the general background of political noise.

However, the bit about the affidavit was apparently true. Not just that, it hides a most interesting tale of innumeracy. In 2007, Dr Ranvinder Sandhu of Guru Nanak Dev University conducted a study on a sample of 600 drug addicts. One bit of data in their published study was that about 70 per cent of these drug addicts were between the ages of 16 to 35. i.e., 70 per cent of drug addicts were youth. Eventually, this was taken by many people (beginning with whoever drafted the affidavit) to mean that 70 per cent of youth were drug addicts. It’s actually quite funny--the kind of joke with which statistics professors begin their classes.

But innumeracy has a terrible effect on people’s handling of their finances. A friend of mine bought an apartment for Rs 21 lakh in 1997 and sold it for Rs 95 lakh a couple of years back. He though these were amazing returns; far superior to what any equity-based investments could have got him. However, the annualised return was 12 per cent, over a period when the BSE Sensex returned 12.9 per cent and an equity fund SIP would have got him 18.1 per cent.

A basic understanding of the arithmetic to the extent of calculating returns and percentages and comparing them is a basic requirement for not just being an investor, but functioning at all in today’s world. Unfortunately, far too many people try to get by without it.