Comparing Numbers: What is valid?

 

Lebron or Jordan?  Mary Ann or Ginger?  Always a debate.  Comparisons are interesting things.  They can fill an entire night of drinking at any sports bar.  What exactly is a "comparison" and how does it play into our decision making process.  According to Merriam Webster:

a: the representing of one thing or person as similar to or like another

His poetry invites comparison with the poems of Robert Frost.

b: an examination of two or more items to establish similarities and dissimilarities

His faults seem minor by comparison.

a comparison of the sports cars

I see comparisons as the essence of decision making.  When we have a decision to make we are assessing outcomes and we decide on the best course of action based on the comparison of our imagined outcomes.  Why else would there be a decision to make unless there were multiple possible outcomes?  If there were only one outcome there would be no decision to make.  Think of driving from one city to another.  If there was only a single road you would take that road.  There would be no other options to choose from.

Thinking back on a number of previous posts I feel that a lot of them have indirectly addressed our abilities to assess possible outcomes and then adequately compare them.  A number of my post have outlined our poor performance in these areas.  If I have learned anything from Behavioral Economics it is that we have to progress through many emotional layers before we can make sound logical decisions.  There is noting inherently wrong with emotions.  I purchase bicycles for many emotional reasons.  I know that if I purchase my bike at a specialty bike shop that I will get a safe reliable bike.  Beyond that I buy the coolest looking bike.

What this post is about is the validity of comparisons.  Even more specific the validity of the data used in a comparison.  Really answering the question "am I comparing apples and oranges".  This thought process began when I was presented with the chart at the top of this post.  I cannot remember where I came across it.  It was a random Youtube video.  It does have the CNBC logo at the upper right so I assume they generated it.  It lists as its source the U.S. Bureau of Labor and Statistics (BLS Site ) (at the bottom of the picture, it may not be clear).

When presented with data such as this chart I am immediately skeptical.  Was the data "arranged" in such a way to further the author's point of view?  I am not accusing the media outlet of fabricating facts.  They are presenting the news in a manner that does address a particular point of view.  A quick look at this chart leads me to guess that the author is trying to portray the average persons reduced ability to save money.  The bottom line labeled "Leftover Income" shows a lesser amount for a 2022 consumer as compared to a 1985 consumer.  I immediately began to delve into these numbers and felt confident that I could make some sense of them.  This clarity could then lead to a logical decision that one could be confident of.  Like many things I was wrong.

 I have spent the last couple writing sessions doing a deep dive into the BLS website.  My main goal was to find some type of relationship between the data in the CNBC chart and the BLS data.  My attempt to do this was an abject failure.  Most of my time was spent in the Consumer Price Index (CPI) area of the site.  This is the area that warehouses the cost of goods that people purchase on a regular basis.  After several sessions I feel that I am less confident about using CPI data than I ever have.  If you dare here is a link to the BLS CPI calculation.  If this BLS site is not enough for you try this Wikipedia site

As I have known for some time the CPI is calculated based on a "basket" of goods and services that people normally purchase.  I did find some relationship between the expenditures in the graphic and the CPI categories.  I knew that the basket is updated from time to time to reflect new items and services.  Some of the things I learned is that the CPI is calculated for 32 different geographical regions in the United States.  I also did not realize that the items are weighted.  What this means is that some goods and services will have a greater impact on the CPI calculation.  This weighting is based on consumers propensity to purchase the item.  Basically something that is purchased more will have a greater affect.

The most important thing I have learned in all of this is how useless these numbers are to making decisions.  As I was working through all of these definitions and explanations I began to realize that I had rarely ever made an important decision based on CPI data.  I tried to think of a scenario where this data might influence a decision I might make.  I could only imagine one scenario.  The CPI is a broad measure of inflation.  If the CPI is rising month to month that is an indication the the economy is heating up.  In response central banks will raise discount rates which will cause mortgage rates (and any other debt vehicle) to rise.  So if I had a mortgage and the CPI is rising I may want to lock in my interest rate to avoid any increases.

Other than this narrow application I cannot see how the CPI or any other economic data would affect my day to day decisions.  I do not want to belittle the fine work of the people at the Bureau of Labor and statistics.  I am sure the data they provide goes along in helping policy makers guide our economy.  For our decisions we rely on more street level hands on data.  I know prices are rising due to my weekly trips to the supermarket.  I will make decisions based on the cost of an item and the utility I receive in consuming it.  In spite of the rise in cost I still purchase high quality hot dogs.  If I have to I will save money elsewhere to afford the higher cost of premium hotdogs.  I see the price of gas daily.  These are my data warehouses and the best sources of decision making information.  As for CPI it makes for a good bar room debate about the effectiveness of our current administration.  Usually a debate that make consume an entire evening at the local pub.  Not unlike the Mary Ann Ginger debate or the Lebron Jordon one.