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An Exploration of Numeracy
Numeracy significantly impacts the quality of your money judgements and decisions. You don’t need to be a math genius to make good choices, but you do need to have some basic understanding of math concepts. Innumeracy can carry a heavy price.
Innumeracy is defined as the lack of ability to understand and work with numbers and basic mathematical concepts. Many people struggle with financial numeracy, and this creates challenges when digesting economic news – without understanding the numbers, how can you know when it’s time to be concerned?
Every day ushers in a fresh set of numbers, statistics, and percentages that form the lexicon of personal finance. It’s easy to become lost in this jungle of numbers if you can’t put them into proper context.
Understanding Stock Market Statistics
Perhaps you hear on the financial news that ‘the stock market’ declined by 200 points. You immediately become panicked and wonder if the market is collapsing. Well, commentators are usually referencing the Dow Jones Average which is trading around 40,000 at this writing. Therefore, a 200 point decline is around one-half of one-percent. The average daily fluctuation in the stock market over the long-term is between one-half percent down to one-half percent up. In other words…completely normal. Nothing to see here.
In the example above, if you focus just on the numerator without the context of the denominator, you open the door to errors and biases in your decision making. Denominator blindness is very dangerous when you look at financial news because every number has a ‘normal’ reference range.
Think about the numbers on your bloodwork report from the doctor. Usually, each number listing has a ‘normal’ range outlined so that you can understand what the number means. Without this context, the findings are just a jumble of raw numerals.
Innumeracy as a Generational Divide
You may not be surprised to learn that there’s a generational divide when it comes to numeracy. The grand majority of high school and college students aren’t proficient in math. This isn’t just an education problem, but rather a larger life issue.
Professor Ellen Page in her book Innumeracy in the Wild, says, ”Innumeracy follows people out of the classroom and into their everyday lives.” Page’s research shows that people who are more numerate handle their finances better, which ultimately makes them happier and wealthier.
How to Improve Your Numeracy
Your numeracy or number sense is not unchangeable. These skills aren’t always inherent, so you can definitely improve your numeric abilities and decision making over time.
The late Daniel Kahneman wrote extensively about how intuition and mental shortcuts impact decisions relating to numbers. How you combine the psychological aspects and objective numeric aspects determines how you approach choices involving numbers.
For example, you might read that the stock market has declined for three straight days and wonder if this is signaling trouble ahead. Highly numerate people might understand that there are about 250 trading days per year and a sample size of three is very small. Your intuition about numbers can help you decipher the information appropriately.
If you’re less ‘numbers inclined’, you’re more likely to rely upon easily accessible and imaginable information. Stories and emotion laced reactions can end up framing your decisions. That’s usually not the best way to make decisions about money.
Your money life revolves around numbers, basic arithmetic, and simple statistics. You don’t have to be an expert, but just understanding the relationship between numbers and your life helps. Start there.
Related: Is Your Financial Life Sustainable?