Earlier this year I was reading through some online articles and there was a theme. The theme was: the world is ending because the stock market just suffered its largest single day point drop in history. Nothing like fear to start the day.
Fortunately, for those paying attention, this is nothing more than a magic trick.
Magic Trick Explained
The magic trick they use uses math to trick make things seem larger (or smaller) than they are. By focusing either on the percentage change or the dollar change, they can pick the one that tells their story better, even though all versions of the story are the same, just with a different frame.
Do you remember divisions? I'm old enough that I can remember having to do long division by hand. Some of you might not even know what that is anymore. And that's the point. As we've moved to having more and more calculations done, not in our heads or by hand, but by calculators, spreadsheets, and computers, it's easier and easier for us to forget what the process was to get to the answer.
In division, there is a dividend, a divisor, and a quotient. In common terms, it's one thing, divided by another thing, to get the answer. Unlike addition or multiplication, the order of the numbers matters. 15 divided by 3 is not the same thing as 3 divided by 15. Further, if the dividend goes up, the quotient goes down.
What that means is that if you take a number and divide it into a small number, you'll get a big answer. But if you take the same number and divide it by a larger number, you'll get a smaller answer.
Using that logic, if the stock market lost a certain dollar amount, say $100, and the level at the start of the day was $500, the the stock market lost 20% (100/500). A 20% loss is significant. Over time stock markets rise and if the stock market loses the same $100 but this time the level at the start of the day was $1,000, then it lost only 10% (100/1,000) if though in both cases the loss was $100.
I know a guy who gets invited to do interviews on cable news programs and he once told the story of one of his first interviews where he was giving his opinion along with two other guests. He was told that he would have two or three minutes to give his input. Before he could, the other two started arguing pretty heavily and the director had the cameras kept on the fight. Toward the end he was told he could give his opinion but there was only 30 seconds left.