Just How Numerate Are You?

American students lag far behind the rest of the world in math. This has consequences far beyond the classroom as it turns our children into future victims – unfortunately, along with many adults as well. If you didn’t immediately grasp the point in the Yogi Berra pizza story in the preheader above, you could very well be a victim in waiting. Full disclosure: I was a math major, CPA and once worked as a financial analyst.

This story is unbelievable, but true. A McDonalds competitor (A&W) aggressively marketed its one-third pound burger at the same price as McDonald’s Quarter Pounder. In blind taste tests, consumers preferred the A&W burger; nonetheless, they were not selling. Perplexed, A&W hired a leading market research firm to conduct focus groups. The answer turned out to be simple but shocking: most people surveyed believed that 1/4 pound was bigger than 1/3 pound. After all, 4 is bigger than 3, isn’t it?

There are many common misunderstandings about numbers that harm consumers; the most ubiquitous and most damaging involves interest. Consumers are bombarded with promotions advertising “interest free“. This is highly deceitful. Whenever credit is extended, someone somewhere is incurring interest and you are bearing the cost. There is no such thing as no interest or interest-free; it is an economic impossibility!.

Some mortgage finance companies advertise “no closing costs“, another impossibility. Closing costs, often many thousands of dollars, don’t magically disappear, nor does some beneficent philanthropist pay them. The closing costs simply are buried in other parts of the transaction, most likely in the interest rate. By charging an above the market interest rate, a finance company can recover many thousands in closing costs. The closing costs are not free; you are still paying every last dollar of them.

You receive an unsolicited stock recommendation from a broker and the stock goes up. Soon you receive a second stock pick and it also goes up. You receive two more of these recommendations, both of which are profitable. The broker now has been right four out of four times and when he contacts you to open an account, you eagerly oblige and then promptly lose money. What happened? The broker started out with 1,600 prospects, advising 800 to buy and 800 to sell. By continuing this process, the broker is assured of having 100 prospects for whom he has been right four times in a row.

It is rare but possible that some advertised sales are genuine and products actually sell for less than before. Typically however, “sales” are legerdemain, prestidigitation and maskirovka. It works like this. A business wishes to sell a product for say $80 but establishes a phantom price of $100. The business then serially promotes a variety of specials such as low or no interest, no payments for one year, price discounts and free add-ons – each of which is calculated to result in an effective price of $80. The ways of doing this – and hoodwinking potential buyers – are limited only by the imagination.

Test Your Numeration Skills

We close with three problems for readers who wish to test their quantitative knowledge. These are at middle school level and involve simple percentages. We will publish the answers along with explanations in next week’s posting. Good luck.

Problem #1: You buy 100 shares of ABC company for $50 per share. Six months later you sell it for $40 per share. Which of the following is the most accurate?

(a) Your stock deceased 20%.

(b) Your stock decreased at the rate of 40%

(c) For you to break even, the stock would have to increase by 25%

(d) If you buy 100 more shares now, you break even if the stock goes up 12.5%

(e) Only (a) and (b) are true

(f) All are true except (e)

Problem #2: You and your spouse share a 12-inch pizza. You eat 60% and your spouse eats 40%. Which of the following is/are true?

(a) You ate exactly 20% more than your spouse

(b) You ate exactly 33% (one-third) more than your spouse

(c) You ate exactly 40% more than your spouse

(d) Your spouse ate exactly 33% (one-third) less than you

(e) Both (b) and (d) are true

(f) None of the above is correct

Problem #3: You desire to establish a price for your product that will enable you to have a gross margin of 35%, i.e. 35% of the sale price needs to be available to cover overhead and profit. It costs you $90 to make the product; what price must you charge?

(a) There is insufficient data provided to compute that answer

(b) The price should be $125 to cover the $90 cost and have $35 left over

(c) The price should be $90 x 1.35, or $121.50

(d) The price should be determined by dividing $90 by (1- .35)

(e) The price should be computed by dividing $90 by (1.35)

(f) None of the above is correct

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Our next post observes the anniversary of Red October.

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More Liberty Less Government – mllg@cfl.rr.com – www.mllg.us

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