In last month’s Ascent Adviser, we discussed how using different starting points when assessing returns can be misleading. This month we delve deeper, by looking at statistics and how they can also be misleading.
We’ve all heard the saying “numbers don’t lie”, well this is true. But, numbers can be misrepresented and there are numerous ways in which they can fool us.
We’ve become a society which is increasingly becoming obsessed with data, which has become a fundamental part of our economy and culture. Statistics can be misrepresented or manipulated to prove a particular point, as explained in the examples below.
In 2007, Colgate used the slogan “More than 80% of Dentists recommend Colgate” on a billboard in the U.K. which was eventually deemed to be in breach of U.K. advertising rules. This is an example of how advertising can be misleading as, in a survey, dentists and hygienists where allowed to pick one or more toothpaste brands, which lead to a misrepresentation, as competitor’s brands where recommended just as much as Colgate was.
Graphs can be subject to cherry picking, which entails the careful selection of a time range of data points to endorse the desired outcome. As seen below, the first graph was used for the plateau in temperature to disprove the theory of global warming, however when looking at it over a longer period, it is clear that the globe is warming. Therefore, using the first graph, and only the first graph, to disprove global warming, is a prime example of misleading statistics.
Investment returns can also be easily misunderstood, for example: if you start with R100 and your investment decreases by 20%, then immediately rebounds by the same amount, you now have R96. Your investment would need to grow by 25% to restore its original value, proving that downside protection is just as important as upside potential, when investing over the long term.
When viewing statistics and using it as a basis to drive decision making, we need to be more mindful that statistics can be misused either intentionally or due to error.
“Statistics do not create themselves, people have to create them”. We are cognisant of this and pay close attention when assessing your portfolio and giving the relevant advice.