Chart Crimes

Chart crimes make frequent appearances in the world of finance, and they can attract a great deal of attention. What is a chart crime? It is often an attempt to mislead people who quickly glance at a chart. This can mean manipulating start or end dates to show a particular outcome or cropping chart axes to make a small change seem bigger than it is in reality.

The most famous quote relating to statistics was attributed to benjamin israeli by mark twain who quoted him as saying there are three kinds of lies lies damned lies and statistics this is a line that’s often brought up in discussions where one person mistrusts the statistics their opponent is using to add weight to their point while it’s true that statistical

Outputs can be manipulated or presented in ways that distort the picture the whole point of statistics is to extract useful information from the available data in order to better inform our understanding and improve our ability to make good decisions there are a number of reasons that people analyze data one is a scientific analysis done to try and better

Understand the world and the other is to prove a point that may or may not be true often the second type is created by marketers or politicians who start with a conclusion and then torture the data until it agrees with their point of view these are the people that give statistics a bad name and they often express their questionable analysis in a misleading chart

That we call a chart crime this week a good example of a chart crime crossed my desk and just to be clear this is far from the worst i’ve seen but i felt i had to make a video about it the chart that got me all agitated is on the screen right now and i’m hoping that my viewers can quickly see a few problems with it it’s supposed to be showing us the change in net

Worth by wealth percentile of americans over the first three quarters of 2020 i’m guessing that it’s attempting to communicate something about how the pandemic affected inequality in the united states but it doesn’t really communicate very much so what are the problems with this chart on first glance you might think that by september 2020 all groups are better

Off than they were pre pandemic as all groups seem to have seen increases in wealth during the crisis this is a little bit surprising considering the number of layoffs that have occurred and the number of businesses that appear to be struggling you would think that one of the groups might have taken a hit the chart suffers from many problems firstly we’re seeing

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Dollar gains split up into baskets that contain different numbers of people one basket shows one percent of the population another nine percent of the population another shows 40 percent and the last basket contains half of the population a chart like this struggles to communicate any useful information another glaring issue with this analysis is that it tracks

These groups by wealth percentile over time forgetting that the actual people in these baskets are constantly changing over time a person in the top 1 say back in 1999 might be there because they owned cmgi stock the hottest internet stock of the 1990s a year later that person might be in the bottom 50 percent because the stock collapsed when the dot-com bubble

Burst if you created a chart that showed that the top one percent in 2003 have more money than the top one percent did in 1999 that might be true but they might also be an entirely different group of people all of the dot-comers might be gone replaced with hedge funders who had grown in wealth as their industry boomed in the early 2000s such a chart might have

Been deliberately designed to mislead the reader with the idea that the people who were on the top in 1999 continued to prosper over the next three years while everyone else suffered when in fact there was a changing of the guard as one business declined and another one prospered enough with the top one percent what else is wrong with the chart well every year

Oxfam the british charity puts out a press release designed to go viral they announced that the top x number of people in the world have the same amount of wealth as the poorest half of the world’s population around 4 billion people it might surprise you though that the bottom 10 of the world’s population contains an awful lot of americans and europeans in fact

There are considerably more americans and europeans at the very bottom than there are towards the middle why is there such poverty in the developed world you might ask the answer is that in these parts of the world an awful lot of people have a negative net worth a doctor for example who has just graduated from medical school might be in the bottom 10 of wealth

Due to student loans consumer debt and underwater mortgages they won’t spend long in the bottom 10 percent however when their high income career kicks in an individual with a high income but higher spending will also show up near the bottom but this person won’t obviously be in as bad of a financial position as you might expect so what if instead of looking at

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Wealth we look at income well the top one percent of incomes is not a static group either individual incomes can vary significantly from year to year around 11 of americans will find themselves in the top one percent of earners for at least one year during their prime working lives and half of americans will find themselves in the top 10 at least once in their

Careers this volatility doesn’t just happen at the top of the wealth distribution 54 of americans find themselves in or near poverty for at least one year by their 60th birthday according to research from cornell university this video is not about wealth inequality in truth i know next to nothing about the subject which i imagine is complex and nuanced but i do

Know bad statistics when i see them there’s pretty much no useful information in the original chart in fact it looks like it’s been specifically designed to obscure any interesting information that might be contained in the data that was used in its construction the pandemic and the associated lockdowns caused the global economy to suffer its most severe decline

Since the great depression there were most likely huge transfers of wealth over the last year where certain sectors of the economy prospered and others collapsed many people lost jobs or saw their incomes cut many formerly prosperous businesses failed destroying the wealth of their owners there will have been many changes over the last year for americans from

Almost every wealth bracket usually data is presented in chart format in order to clearly communicate important information a particular style of chart might highlight the most important feature of the data so what should we look out for in trying to spot chart crimes zooming in too much on a chart to make small moves look way more dramatic than they actually are

You often see this after the stock market has had a bad day people post stock market charts zoomed in to make a three percent move look like the end of the world leaving out the y-axis in a chart is another chart crime so that the reader doesn’t know if it’s in dollars in percentages in numbers of people or what unlabeled accesses are always a red flag putting

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Too much confusing information in a chart so that it’s undecipherable is another chart crime overlaying charts that look a bit like each other and using that to make a prediction this is rarely useful as it ignores all of the times that a similar setup occurred without leading to the same conclusion we often have to be wary of charts or statistics presented

By those with a political axe to grind or those with a dog in the fight a tobacco company executive telling you the health benefits of smoking should possibly be treated with some skepticism statistics is central to the scientific method it helps us to understand if an observed effect is real or statistically significant or if it’s entirely attributable to

Randomness thus good statistical analysis is of great importance it’s used in things like drug trials for example where scientists are trying to work out whether a given medication works or not scientists will do a lot of testing possibly comparing the new medicine to existing treatments to see if it provides any improvement they’ll also analyze the effects to

See if an observed improvement is just a placebo effect similarly statistics is extremely useful to a trader who’s trying to understand market behaviors let’s say for example if you think that low pe stocks will outperform or if you think that a commodity that’s trending upwards will continue to trend you can download some data do some statistical analysis and

Work out if these approaches actually worked in the past if they do appear to have worked you can then analyze whether the outperformance is statistically significant or if it’s consistent with randomness a good researcher will calculate each statistical output carefully these can be thought of as pieces of evidence collected by a detective whose goal it is is to

Uncover a piece of important knowledge as enough evidence is gathered together a researcher can then make a good case that might drive an important decision if you want to learn more about statistical analysis and how it might be used to improve investment decisions check out my book statistics for the trading floor i’ve put a link to it in the video description

When approached with honesty and genuine curiosity to make discoveries statistical analysis is hugely helpful you just have to watch out for lies and damn liars see you next week bye

Transcribed from video
Chart Crimes By Patrick Boyle

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