PSU Insight

The Importance of "Running the Numbers"

Never Assume the Obvious is True!

One of the biggest mistakes that pro speakers can make is to assume that the "obvious" answer is the correct one. As it turns out, when it comes to numbers, the "obvious" answer is not only often not true, it can be horribly wrong!

Let’s consider a simple example. Let’s say you have an investment — some shares in a company, for instance, or a new project. Now it’s not unexpected for an investment to lose money at the beginning, and — sure enough — the value of your investment drops by 30% the first year.

But you’re confident that it’s a temporary problem and you hang in there. Sure enough, the following year your total investment increases in value by 40%!

Now comes the question — how much did your investment increase over that two-year period?

(Don’t try to calculate it. What’s your “gut” response?)

For many people, the “obvious” answer is a 10% increase. (You had a 30% decrease followed by a 40% increase. That should result in a 10% increase, right?) Other people might recognize that the result isn’t exactly 10%, but they expect a profit somewhere around 10% — maybe slightly higher, or maybe somewhat lower.

What about you? You might be surprised to discover that….

you didn’t make money at all. In fact, your investment actually declined 2% over that period!

Don’t believe it? This is your first example of the importance of running the numbers. Rather than using a formula (yech!) to calculate the result, let’s just plug in some sample numbers —

1. Let’s say your initial investment is $100. A 30% drop in value lowers it to $70. (30% of $100 is $30; $100 minus $30 is $70.)

2. Now the “good times” occur and your investment rises 40%. A 40% increase in $70 raises the value of your investment by $28 (40% of 70 = 28), increasing the value of your investment to $98…

which is $2 (or 2%) less than the investment’s original value!

The point of this example is that you should always be careful to “run the numbers.” Don’t assume that the obvious answer is the correct answer.

The “obvious” answer can be wrong… sometimes very wrong.