I have a brilliant friend who has worked for many big and important media houses. He told me once – when he was heading a magazine – “I have made up my mind, please do not confuse me with the facts!”. This was when he was doing a story on mutual funds and unit linked plans.

In life I have found many such stories. A friend used to work for Hindustan Unilever (once upon a time when it was actually called Hindustan Lever). A new entrant had launched a product called ‘Nirma’. As a research guy he had to prove how Surf was better than Nirma. Every day he would have to do some experiment. Once he got tired and said ‘let me PRINT the conclusion that “Surf is superior to Nirma” – it really does not matter what I write above that, does it?”

Similarly there are some questions for which I can design calculators which will tell you EXACTLY what i want it to tell you. For example recently I found (in a very reputed personal finance magazine) a retirement calculator which assumed CPI (consumer price index) of 3.1% and had a ‘buy vs. rent’ calculator which assumed that over 20 years you will pay 12% interest on your home loan, and your investments will grow at 7% per annum! Now this is a funny assumption! In a country where interest rates are 12% if equity returns are 7% (for a period of 20 years) what happens to risk premium? Why are stock exchanges in existence at all?

The subprime problem in the USA has happened only because of this! ASSUMPTIONS. There is an old saying ASSUME – makes an ASS out of U and ME. If you take any number and extrapolate it over long periods of time, you can prove anything. But just as the trees do not grow to the heavens, mathematical projections should be used with some brains. I asked my daughter “If a cow has 4 legs at age 1, how many legs will it have at age 4?” In her keenness to show off her ‘table’ skills she said 16. However when this happend she was 7 years of age and not the head of risk in a BOND rating company.

The NHS (national health service) in UK is notorious for its delay. Once upon a time it used to take 4 hours waiting to get an abortion done. Then the time increased to 5 days. Surely an over enthusiastic excel freak can prove at in another 58 years it will take about 10 months to get an abortion done.

Similarly the population of Mumbai grows by a %age far greater than the population of India. In an excel sheet I will be prove that at some point in time the population of Mumbai will be greater than the population of India. Mathematically it should not be too difficult.

Your luck again. I do not head the risk function of any bank. I know some of them – they are the biggest risk the banks run!!

Related Articles:

Post Footer automatically generated by Add Post Footer Plugin for wordpress.

  1. I am really happy that subramoney is coming up with different topics other than constantly telling people to not to do stupid mistakes.

  2. 🙂 Let me check my multiplication tables again…
    But what I have seen is too much of ivory tower living makes you lose connect with reality, with the real cost of things, with risk too.

Leave a Reply

Your email address will not be published. Required fields are marked *

You may use these HTML tags and attributes:

<a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <s> <strike> <strong>