Understanding statistics or maths means NOTHING

I have always been of the firm opinion that it is easier to understand stats or maths applications than to understand business. Or did I contradict myself?

Well, well, if you did not understand cricket BUT understood statistics you will come to 2 WRONG conclusions based on YOUR understanding of maths and stats.

1. Inzamam Ul Haq is a better batsman than Sachin Tendulkar: Data can easily be shown (created) as to how Inzzy is a great player – and plays well in IMPORTANT matches, whereas SRT plays in all matches, but fails in important pressure matches. It is all about forgetting that when the sample becomes larger, OBSERVATIONS are more accurate. So over a smaller period of time, Inzzy could have been more effective, but when you try to prove that over a longer period of time, NOT ENOUGH DATA is available for Inzzy.

2. Inzaman Ul Haq is a better player in New Zealand than SRT: When India goes to NZ, the NZ authorities prepare green tops – which makes batting against the NZ quickies very difficult. Since the NZ authorities know that Srinath, Irfan pathan, etc. do not generate that kinda pace, it suits them to make such wickets. However when Pak visits NZ, the NZ authorities are afraid to make a green top. If the bowlers are Waqar and Wasim – the NZ batsmen will NOT be able to bat! So YOU need to understand that Inzzy and SRT are actually batting on DIFFERENT wickets to say the least.

3. Harbhajan Singh – ‘a good bowler who suddenly lost form’ is a wrong interpretation! A bowler who needed an amazingly accurate partner (Kumble) on the other end is a far better interpretation!

When Corus was taken over by Tata Steel, I could not understand the numbers AT ALL. Even things like freight were diff to understand from the Corus P&L and B/sheet. When I sat with an industry expert, I realised how much one needs to understand the business before one can understand the numbers.

When we did a research on SUPREME INDUSTRIES we appreciated the amazing costing and other knowledge that their CFO Mr. O P Rungta ( father of the now famous Harsh Rungta of apnaloan.com fame!) had about the INDUSTRY. He knew the sales dynamic and why each product was made where. I think they had more than 12 factories and this man had all the nos. on his finger tips!

So before you draw conclusion based on mathematics you need to understand the industry.

For example in the life insurance industry you need to know:

1. Can you process a fake claim in the insurance company that you are analyzing. Once this is answered in the affirmative, the nos. do not matter.

2. Strength of the underwriting team, and its influence on the business

3. Cost of rebutting vs cost of paying out a claim – the management view and the market dynamics

4. Average ticket size of policy vs Avg claim size

5. Claim ratio as shown: does it include maturity claims

6. What is a quick claim – and how is it investigated

7. Quick claim/ total claim ratio

etc. etc. etc.

This is meant for people who think insurance ratios are easy to understand, welcome to Insurance claims 101 – this was class 1.

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