Friday, May 1, 2009

Understanding Data

Many news sources are touting the performance of the stock market over the past two months. According to one article (not available in its entirety), the Dow-Jones World Index is up 12%, the best two month performance since its inception back in 1991. Other measures have strong results, as well.

But for many of our students, there's a tendency to assume that a percentage point gained in the recovery will negate a percentage point lost in the recent fall. That's not true. This is an excellent opportunity to review some basic math and statistics with your students.

A one percent fall from a level of 10,000 is 100 points. A one percent gain from a level of 10,000 is also 100 points. Unfortunately, we're not starting the climb at the same level we started the fall.

At its height, the Dow-Jones was above 14,000. At its recent nadir, it was below 7,000. That means a one percent drop was 140 points at the top and a one percent gain at the bottom was less than 70 points.

The market has gained back some lost ground, but we're not out of the woods yet. As always, your comments are welcome.

This post relates to the following Keystone Economic Principles:
7. Economic thinking is marginal thinking.

Back on April 21, in a post with a similar theme - understanding data - I posted on President Obama's directive to cut $100 million from the federal budget. Now, I've run across an excellent video that also does a very good job of clarifying the scale of the problem. (HT to Division of Labor.)

I'd say it probably doesn't provide a direct answer to the question asked here, but it's effective.

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