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Innumeracy can lead to bad investment decisions

However, the bit about the affidavit was apparently true. In 2007, Ranvinder Sandhu of Guru Nanak Dev University conducted a study on a sample of 600 drug addicts. Dhirendra Kumar writes.

india Updated: Oct 22, 2012 00:35 IST
Dhirendra Kumar

However, the bit about the affidavit was apparently true. In 2007, Ranvinder Sandhu of Guru Nanak Dev University conducted a study on a sample of 600 drug addicts.

One bit of data in their study was that about 70% of these drug addicts were between the ages of 16 to 35. i.e., 70% of drug addicts were youth.

Eventually, this was taken by many people to mean that 70% of youth were drug addicts. It's actually quite funny - the kind of joke with which statistics professors begin their classes.

But innumeracy has a terrible effect on people's handling of their finances. A friend of mine bought an apartment for Rs. 21 lakh in 1997 and sold it for Rs 95 lakh a couple of years back.

He though these were amazing returns; far superior to what any equity-based investments could have got him. However, the annualised return was 12%, over a period when the BSE Sensex returned 12.9% and an equity fund SIP would have got him 18.1%.

A basic understanding of the arithmetic to the extent of calculating returns and percentages and comparing them is a basic requirement for not just being an investor, but functioning at all in today's world. Unfortunately, far too many people try to get by without it.